Do you dread doing taxes? If you're like most people, you probably do. And with good reason; filing them is dry and complex. But the good news this year is, for some, taxes just got simpler.
If you sell online and would like to claim a home office deduction, there is a new method the IRS has announced that is simpler and requires far less record keeping. In this article, we'll look at what the method means, the steps to qualify for it, and how you can decide if it's right for you.
What the method is
The simpler method is actually not a new home office deduction, but a new way to claim it.
In the past, people who claimed the home office deduction had to itemize their expenses and keep detailed records, says Cliff Ennico, a business attorney and author of The eBay Seller's Tax and Legal Answer Book. This meant they could then deduct things such as home depreciation.
Under the simplified method, all you have to do is measure your home office and multiply the square footage by $5. For instance, if your home office is 200 square feet, you could deduct $1,000 this year. The only document you will need is proof of your home office's square footage. You can do this by copying your escrow statement or having a contractor measure your office.
How you can qualify
Just like the original home office deduction, to qualify for the new method, you must prove that:
- Your home office is your principal place of business.
- Your home office is used regularly and exclusively for business.
You can't do business elsewhere, and personal use of your home office must be kept to a minimum
This means you can't do business elsewhere, and personal use of your home office must be kept to a minimum, Ennico advises. You can have personal possessions in the office, but the space should not be used for any other purpose than your business.
"There is a very big difference between a home office and a man cave," he notes.
This deduction can apply to employees who work from home as well, according to the IRS. For more on how to qualify, visit the IRS website and see Publication 587: Business Use of Your Home. Or, if you can't stand sifting through legal jargon, consider consulting a finance expert.
Choosing a method
The simplified method could be very appealing to small business owners, especially online sellers, says Crystal Estes, Auctiva's Director of Finance.
Many merchants have modest home offices and wouldn't benefit from huge deductions, she says. So choosing this new method could save people a headache and cut down on recordkeeping.
But Ennico cautions that while the simplified option is easier, it also limits how much you can deduct to $1,500. And some eBayers out there would benefit more from using the older method.
Before deciding, Estes points out that it's a good idea to fill out both methods and compare the two to see which is best for your needs. "Don't just take this option because it's easier," she says.
However, if you choose to go with the simplified method, you can file it at the start of tax season. You can choose the simplified method or the older method for any tax year. You can also change this method from year to year, but you can't change methods in the same calendar year.
The audit factor
People often worry that claiming new deductions will trigger an IRS audit, but this concern is largely unwarranted, Ennico asserts. Doctors and dentists got into trouble in the 1990s and early 2000s with the deduction because it was a more complicated issue back then.
If you follow them closely there should be no greater risk of audit than there would be when taking any other deduction
"This is no longer the case," Ennico advises. "The rules aren't easy to comply with but they are relatively clear. And if you follow them closely there should be no greater risk of audit than there would be when taking any other deduction."
The bottom line
Anyone who works from home can and should take a home office deduction. If you decide to go with the regular method, file Form 8829 along with your Form 1040 by April 15. If you opt for the simpler method, there should be a line item on Form 1040. If you don't see it, contact your tax professional. You can download both forms here.
But anyone seeking to claim this new method should consult a tax professional, Ennico notes.
"I'm a big believer in doing that, regardless of the deductions you wish to take," he says. "For two reasons: One, they do this stuff all the time so they are bound to get it right, or at least closer to right than you would do yourself…and two, if they screw up, you can sue them for malpractice."
For more information about the simplified home office deduction, view this PDF on the IRS website.