The home office deduction: what you should know

To take advantage of the home-office tax deduction, IRA rules require the home office to be your principal place of business and that it is used exclusively and on a regular basis. According to the Small Business Administration, just over half of the country’s small businesses are based in a home, but only a small number of taxpayers claimed the deduction.

The most common reason for not taking the deduction is the complexity of the paperwork (i.e., IRS Form 8829) taxpayers must fileA second reason for not taking the deduction is fear of an IRS audit, which may also be attributed to the form’s complexity.

But there is a simplified, “safe-harbor” method of calculating your home-office deduction. In essence, you are allowed to deduct a flat $5 per square foot of dedicated office space in your home, up to a maximum of 300 square feet, yielding a $1,500 maximum deduction. Under this alternative, a taxpayer can forgo all the information-gathering and avoid the multi-line tax form previously required.

The second and established method for a home-office deduction uses IRS Form 8829 whereby taxpayers must determine which costs are “direct” or “indirect” expenses.  

Direct expenses let you write-off 100 percent of costs associated specifically with your home office — everything from painting the office to buying a work computer, or a second phone for the home-based business.

Indirect expenses are pro-rated, based on the size of your home office. These are things like your property insurance, mortgage, utility bills and home-alarm system. If the square footage of your home office equals 10 percent of your home, you can claim 10 percent of these expenses. Additionally, one must compute depreciation for the home-office portion. Good luck with that one.

You may choose either the simplified method or the actual expense method for any year. Once you use a method for a specific tax year, you cannot later change to the other method for that same year. Each home-office deduction method has its benefits:   

• Simplified Method:

Very simple computation; $5 multiplied by the square footage of the home office. The maximum write-off is $1,500. This method eliminates the need to fill out the complex Form 8829. No receipts needed for insurance, utilities, repairs and maintenance, which reduces record keeping and computation to a minimum. This “safe-harbor” method may be better for people who have paid off the mortgage or who have low property taxes. No depreciation deduction is allowed, nor is a later recapture needed.

• Actual Expenses Method:

Taxpayers with offices larger than 300 square feet will receive a larger tax deduction using this method. If your actual expenses are higher, then it would make sense to use them to determine the deduction. Unused expenses (i.e., losses) not used for current year can be carried over to the next year, which the simplified method does not allow. There is no maximum annual deduction.

For most taxpayers, it is recommended that they prepare the home-office deduction for 2024 using both the new optional method and the traditional method and then choose the one that provides the maximum deduction. Regardless of which method you choose in 2024, you have the choice in subsequent years to choose which method benefits you the most.

Barry Lisak is an IRS enrolled agent specializing in personal and small business taxes for 30 years. Any questions can be directed to him at 516-829-7283, or mrbarrytax@aol.com.