New Simplified Option for Claiming Home Office Deduction

Just in from the The Internal Revenue Service who announced a simplified option that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes. In tax year 2010, nearly 3.4 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction). The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.

“This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction,” said Acting IRS Commissioner Steven T. Miller. “The IRS continues to look for similar ways to combat complexity and encourages people to look at this option as they consider tax planning in 2013.” The new option provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions.  Taxpayers claiming the optional deduction will complete a significantly simplified form.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method. Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible. Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.

The new simplified option is available starting with the 2013 return most taxpayers file early in 2014. Further details on the new option can be found in Revenue Procedure 2013-13, posted on IRS.gov. Revenue Procedure 2013-13 is effective for taxable years beginning on or after January 1, 2013, and the IRS welcomes public comment on this new option to improve it for tax year 2014 and later years.

Holt Pros wants to remind you, although the new option provides taxpayers a simple method to claim the home office deduction, it could potentially limit the available tax deduction for many taxpayers. Tax deductions offer a reduction in taxable income, and thus reduce your tax liability. When making your selection, be sure you give consideration on which will offer you the most tax savings.

Related articles

• Claiming a home office deduction is about to get easier (money.cnn.com)
• Deducting Your Home Office (Read: Couch) Just Got A Whole Lot Simpler (forbes.com)

Tax Deduction for Home Office

You can deduct home office expenses as a legitimate business expense. As with any tax deduction, there are rules to meet to qualify for the deduction. “Home” is defined as a house, apartment, condominium, mobile home, boat or similar property which provides basic living accommodations. It also includes structures on the property, such as an unattached garage, studio, barn or greenhouse. The picture shown here is actually a shed that was converted to a home office.

Let’s look at some of the basic rules to meet. To qualify for the deduction of the business use of your home, you must use part of your home:

• Exclusively and regularly as your principal place of business. (Exceptions to exclusive use for daycare facilities and areas for storage of inventory or product samples)
• Exclusively and regularly as a place where you meet or deal with patients, clients or customers in the normal course of your trade or business.

You can have more than one business location, including your home, for a single business and still qualify for the home office deduction. If your home office is considered your principal place of business, you qualify. To be considered as a principal place of business, your home office must be:

• Used exclusively and regularly for administrative or management activities of your business.
• You have no other location where you conduct substantial administrative or management activities for your business.

TIP: If your home office qualifies as your principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business.

To determine the business percentage for the home office deduction, divide the area (length multiplied by the width) used for business by the total area of your home. Example:

Your office is 240 square feet (12 feet wide x 20 feet long) and your home is 2,000 total square feet

Your office is 12% (240 divided by 2,000) of the total area of your home so your business use percentage is 12%

Tip: Don’t forget to count closets in square footage if used for business.

Typical expenses for a business home office deduction at the business use percentage are:

• Real Estate Taxes
• Deductible Mortgage Interest (subject to mortgage interest deduction rules)
• Homeowners Insurance
• Repairs (that benefit your entire home such as a furnace repair)
• Security System
• Utilities and Services (electricity, gas, trash removal and cleaning services)
• Rent paid for use of the property you do not own
• Depreciation (if you own your home; does not consider value of land; special rules apply when you sell your home if you claimed a depreciation deduction)

For all tax deductions, documentation and proper records are necessary. Your receipts for home office deductions should include all the monthly itemized invoices or statements for all expenses claimed. Cancelled checks provide proof of payment but are not sufficient in most cases to substantiate deductibility of a business expense. An IRS auditor wants to look at the invoice or statement to see the details of exactly what was purchased.

TIP: Take a photograph of your home office that will reflect exclusive use. Years after your tax return is filed, you may no longer have a home office but you will still need to furnish documentation to substantiate the deduction taken in an earlier year if  audited. Include pictures of clients that visit your home office.

There are extensive rules for claiming a home office deduction. Daycare facilities are treated differently in determining deductions for use of your home for business purposes. This article gives you an overview to educate yourself on some of the basics of taking a home office deduction. If you think you qualify for a home office deduction, I encourage you to research this further. For more details on claiming a home office deduction see Publication 587  at irs.gov or consult an Enrolled Agent who specializes in taxation. You can find an Enrolled Agent at the National Association of Enrolled Agents at www.naea.org. Don’t be afraid to take a legitimate tax deduction if you qualify and can substantiate your claim.