The New Simplified Method. Once you have determined you are eligible to take the deduction, take the square footage of your office space and multiply by $5. That’s it. The maximum amount allowable is $1,500, or 300 square feet. This is an annual amount, not monthly.
The Regular Method. The regular method entails capturing home expenses such as utilities, mortgage interest, and depreciation and then prorating it based on what percentage of your home is used for business purposes (e.g. square footage of your office divided by total square footage of your home).
Pros and Cons. One benefit of using the simplified method is you only have to substantiate the square footage of your home office space in the event of an audit. With the regular method, you would have to produce documents supporting the amounts of your home expenses. In addition, I believe using the simplified method reduces the chance of an audit because there are fewer numbers that can be “fudged”, which the IRS likes. The only immediate caveat I see is that the simplified method might yield a lower deduction amount. It depends on your specific situation and how much your home expenses are. Just remember that if you use the regular method, the amount of expenses such as mortgage interest and property taxes paid will be separated out between Schedule A and Schedule C instead of the entire amount being reported on your Schedule A only. This creates additional work for you and your tax preparer.
For more information about this deduction, click HERE to review an IRS recap of the two methods.
For more information about the requirements to claim a home office deduction, click HERE.
If you still aren’t sure which method is right for you, consult with your tax accountant.
