New in 2014 is the simplified option for claiming the home office deduction. Previously, the only method of deducting qualified home office expenses required determining the applicable business percentage. This can be calculated by comparing the total square footage of the home office with the square footage of the entire home. The business percentage is then applied to the applicable household expenses to determine the expenses attributable to the business area of the home.
Under the new method, taxpayers may deduct $5 per square foot of home office space, up to a maximum of $1500 per year. One of the key benefits of the method is that taxpayers are not required to substantiate the expenses incurred for their home.
This safe harbor method is an election available to taxpayers with qualifying home offices. Claiming a deduction for business use of the home requires that a portion of the home be used for conducting a trade or business. The business area of the home must meet one of the following requirements:
• Used exclusively and regularly as the principal place of business
• Used exclusively and regularly as the place of client or customer meetings
• Used on a regular basis for business-related storage
Once the election is made for the tax year, it is irrevocable.
Aside from the easy record-keeping, the advantages of electing the new method are that depreciation of the property is no longer required and that recapture tax upon sale of the property is eliminated. Also, 100% of mortgage interest and real estate taxes are deductible as itemized deductions.