Updated for tax years 2023 and 2024.
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 returns. 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. The simplified method allows you to take advantage of small business tax perks without the stress of lengthy calculations and record-keeping. Let’s look at how it works.
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 exists to make the calculations and record-keeping requirements much easier.
The simplified method: how it works
Using the simplified method to calculate your home office deduction is easy. 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 means you can claim 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 method to calculate the home office deduction using actual expenses, 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.
Other office expenses
If you take the simplified home office tax deduction, don’t forget about the other business expenses directly related to the business use of your home. Costs like office supplies and business travel mileage are additional deductible expenses you may be able to write off.
How to choose which method to use
While the simplified home office deduction is quick and easy, it may not always be your best bet depending on your tax situation. For example, if you have a larger office, the regular deduction lets you deduct more square footage of office space while the simplified method is limited to 300 square feet.
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. If you have higher expenses in these areas, calculating your actual expenses may lead to a bigger deduction for you.
But for some taxpayers, the difference in the deduction isn’t worth the extra paperwork that comes with the regular method. In this case, 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. Whichever method you choose, our tax preparation software can calculate the home office deduction for you.