Home Office Tax Deduction: Simplified vs Regular Method

Are you a business owner or freelancer who works out of a home office? If so, you should take advantage of the home office deduction when filing your federal income taxes. In the United States, business owners and freelancers who use a home office — or any other area of their home — for business-related purposes can deduct some of the associated expenses from their federal taxes. With that said, the Internal Revenue Service (IRS) supports two different methods when claiming a home office: the simplified method and the regular method.

What Is the Regular Method?

If you’ve claimed the home office tax deduction in a year prior to 2012, you should already know the regular method. It wasn’t until 2013 when the IRS began offering the simplified method.

The regular method involves calculating the cost of your home office, and using that figure as the basis for your deduction. In other words, if your home office consists of 25% of your home’s total space, and you use your home office 100% of the time for business-related purposes, you can claim one-quarter of your total mortgage or rental payments. Additionally, you can claim an appropriate amount for related expenses like insurance, utilities and maintenance.

What Is the Simplified Method?

The simplified method lives up to its namesake by offering an easier and simpler way to calculate the home office tax deduction. Under the simplified method, you’ll receive a deduction of $5 per square feet of home office space — with a maximum of 300 square feet.

Many business owners prefer the simplified method because it doesn’t require calculating the cost of rental or mortgage payments. With that said, you should compare the total deduction of both methods to determine which one is the highest.

What Are the Requirements for Claiming the Home Office Tax Deduction?

Whether you use the regular method or the simplified method, the IRS has a few requirements for claiming the home office tax deduction. First, your home office must be the primary place in which you run your business. If you spend most of your work hours in a commercial office while performing just a fraction of your work in a home office, you won’t be eligible for the home office tax deduction. Rather, you must perform most of your business’s work in your home office.

Second, your home office must be used exclusively for business-related purposes. You cannot use your home office for personal or recreational purposes if you want to claim the home office tax deduction on your federal taxes.

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