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The Basics of the Simplified Home Office Deduction

Business Finance Business Planning Home Ownership Self-Employment Credits & Deductions Self-Employment Tax Planning

Updated for tax year 2020.

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If you have a small business and work at home, you probably know you can take a deduction for the expenses of your home office. However, it’s surprising how many people don’t take this deduction when it comes time to file their tax return. All too often, taxpayers pass it up because it seems like too much trouble to crunch the numbers.

Fortunately, the Internal Revenue Service (IRS) has made life a little easier for small business owners with the simplified home office deduction.

This allows taxpayers to take advantage of small business tax perks without the stress of lengthy calculations and record-keeping.

How to qualify

The qualifications for the simplified home office deduction are the same as the regular home office deduction. If you use a portion of your home exclusively for business purposes on a regular basis, you may qualify for the deduction. This applies to both homeowners and renters as well as all types of homes.

The simplified option purely makes the calculations and record-keeping requirements much easier.

The way it works

For the portion of your home used for business, you can deduct $5 per square foot up to a maximum of 300 square feet. That equals a maximum deduction of $1,500 ($5 X 300 square feet).

Additionally, you can still claim this deduction as well as your full itemized deductions for real estate taxes and home mortgage interest on Schedule A.

Depreciation recapture no more

When you use the regular home office deduction, part of your deduction is for depreciation on your home. As your property depreciates, the basis of the property is reduced by the amount of depreciation taken.

Later on, if you sell your home for more than the amount of depreciation, you may have to “recapture” any capital gain. In other words, part of the gain from the sale of your home may be taxable.

With the simplified method, you don’t have to worry about any of that. While you can’t take the depreciation deduction for your home, you also don’t have to deal with the recapture of depreciation if you sell your home for profit.

The other office expenses

If you take the simplified home office deduction, don’t forget about the other expenses directly related to your business. You can deduct the costs items like office supplies and business travel.

How to choose

The simplified home office deduction is quick and easy, but it may not always be your best bet. For example, if you have a larger office, the regular deduction lets you deduct more square footage of office space.

Using the regular method also allows you to calculate how much of your mortgage payment, utility costs and homeowner’s insurance premiums can be deducted for business use.

But for some taxpayers, the difference in the deduction isn’t worth the extra paperwork that comes with the regular method. That’s when the simplified option may be the better choice. Plus, if your home office is small, you’ll likely get a slightly larger deduction by claiming $5 per square foot.

Luckily, TaxAct can help determine if you qualify for this tax benefit by calculating the deduction for you.

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