The Internal Revenue Service is touting the new “no-doc” $1,500 home office deduction that’s available for the first time this tax filing season, but don’t fall for it without doing your homework. “Remember, the IRS doesn’t necessarily do anything good for taxpayers unless it also benefits them,” says Cynthia Jeanguenat, an enrolled agent in Virginia Beach, Va. She didn’t alert her clients to the simplified deduction ahead of tax filing season “lest they stop keeping track of their expenses as we train them to do,” she says. “Is it easier? Sure. Is the deduction better? Not that I’ve found,” she adds.
Basically, the simplified method is an alternative to calculating and substantiating your actual expenses. It’s like using the standard mileage rate for deducting business auto expenses instead of the more cumbersome actual expenses (maintenance, gas, insurance). It may not be the best deduction but if you don’t keep records, it’s all you can claim.
To snag the home office deduction using the simplified method, all you have to do is multiply the square footage of your home office space (that’s space used exclusively and regularly for your home-based business) by $5, and that’s what’s deductible. The biggest catch: there’s a $1,500 maximum limit to the deduction you can claim this way.
By contrast, under the actual expenses method, you add up your rent or mortgage interest, renters’ or homeowners’ insurance, real estate taxes and utilities, and multiply that times the percentage of your house allocable to your home office. You can also deduct an allocable portion of general house repairs (say a new hot water heater) but that’s trickier. With either method, you can only reduce your business income to zero; you can’t take a loss.