08/21/2013 08:55 am ET | Updated Oct 21, 2013

IRS Introduces New Method to Make Calculating Home Office Deduction Simple


Over the past few years, millions of taxpayers have lost their jobs due to the recent economic slowdown, and many of them started a business working in their homes. In addition, an increasing number of employers are encouraging telecommuting as a way to reduce overhead and meet the global demands of today's business world. In either case, the home office deduction has always been a good consideration to lower your taxes and keep more of the money you earn. However, due to complexity and taxpayer fears including misinformation from the urban myth that if you take a home office deduction you jump to the top of the "IRS Audit List," millions of otherwise qualifying taxpayers did not take the home office deduction. The number of qualifying taxpayers is likely going up each year meaning even more taxpayers miss out on a much-needed tax benefit.

Well listen closely, and I do not say this very often, the IRS has come to the rescue. One of the biggest tax law changes this year is a new method for computing the Home Office Deduction. So if you set up shop at home, you'll want to read on.

New starting in tax year 2013, the IRS has developed a safe-harbor method that will make it easier for taxpayers to compute and claim the home office deduction. It is important to note that the rules concerning how to qualify for the deduction have not changed, instead an alternative way to compute the deduction will make it easier for taxpayers who qualify to claim the deduction.

As I noted, the basic qualification rules for the home office deduction have NOT changed, so a brief overview and understanding of them is important. Volumes of tax information and literature and guidance are written on the home office deduction, but basically, a tax deduction is allowed for expenses associated with the portion of the home that is used as an office on a regular basis. For self-employed persons, the office is the part of the home that is (1) the principal place of business of the taxpayer or (2) a place of business that is used by patients, clients, or customers in meeting with or dealing with the self-employed taxpayer in the normal course of business. For an employee to qualify, the home office use must also be for the convenience of their employer. There are many other considerations that range from separate dwelling locations to occasional or incidental use and defining principal use, but the bottom line is simply this: If you have a location or room in your home that you use specifically for business, either as a self-employed taxpayer or an employee, then you should qualify for the home office tax deduction. Qualifying used to be the easy part. The harder part was capturing the costs, computing the deductions, and providing the documentation necessary to support the deduction. This was difficult and time-consuming and consequently why many taxpayers would otherwise omit taking the tax deduction. That has now changed.

Calculating the home office deduction can still be done the old-fashioned way -- namely documentation and calculation of the actual expenses related to the business portion of your home. Alternatively, taxpayers now have the option to use the new safe-harbor method, under which the deduction amount is determined by a simple formula based on the square footage used as a home office.

To use the safe-harbor method, taxpayers must meet the qualifications for a home office including the requirement that the space be used specifically for business. Under the new method, the home office deduction is calculated by multiplying the business area square footage, not to exceed 300 square feet, by five dollars. Simple as that. Use the total square feet of the home office or 300, whichever is less, times five dollars -- that is it! Unlike the traditional method of calculating the deduction, the safe harbor method is limited to $1,500.

There are other rules for where the deduction goes, such as the Schedule C if self-employed or Schedule A for employees, but the new rules do make the home office deduction much easier to claim. The new method should allow many more taxpayers, who in the past were either intimidated by the complexity of the rules or the record keeping or fear of IRS "home office" audit to now take advantage of the very pro taxpayer rules. If you're still unsure, be sure to talk to a tax professional who can assist you.