Home Office Deductions Just Got “Simplified”

The idea of the “traditional” job has changed in recent years and many more taxpayers are working from home. Unfortunately, the home office deduction is one of the most misunderstood and abused deductions. But the IRS recently announced a simple 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. The new simplified option is available starting with the 2013 return most taxpayers file early in 2014. If you are a client that works from home, Daszkal Bolton would like to be sure that you are correctly and accurately claiming home office tax deductions.

KEY POINT: Many eligible business owners are leaving money on the table out of doubt and fear of being audited. If you have a valid home office, you should take the deduction, especially now that the process just got simpler!

The IRS new safe harbor provision for taking home office deductions for the 2013 tax year allows at-home workers the option to simply take a deduction capped at $1,500 per year based on $5 a square foot for up to 300 square feet.

Though homeowners using the new “simplified” 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.

Benefits of the Safe Harbor Provision

By eliminating the need to fill out all 43 lines of Form 8829, taxpayers who claim the optional deduction will save hours of recordkeeping annually.

With the old method, when you sold your home, you had to pay back any depreciation that you took and it’s taxed at 25%, but with this new provision, there is no depreciation component to it, so there is less concern.

Since the simplified method for claiming expenses for the business use of a home office is optional, taxpayers can change their filing method from year to year.

Which Method Makes More Sense for You?

If you have paid off your mortgage, have low taxes or just use a miniscule piece of your property, you may be better off using the safe harbor method rather than the old, “itemize it” methodology.

Taxpayers with offices larger than 300 square feet should look carefully at how $1,500 compares with deductions claimed in previous years. If your actual expenses are higher, then it would make sense to use those to determine the deduction, which is especially important for taxpayers who cannot itemize their deductions and might lose any deduction for mortgage interest and real property taxes.

Business owners using the regular method to determine their deduction can carry any unused expenses over to the next year, but those who use the simplified method may not.

For the first year of the optional safe harbor provision, taxpayers who have been keeping records to support their home office deduction may want to keep doing so in order to ensure they can claim the largest deduction possible. The IRS has stated that the rules found in IRS Rev Proc. 2013-13 will definitely stand for tax year 2013 but may change in the future.

The basic home office qualifications have not changed, here is a quick refresher:

Home office expenses may be deductible if part of your home is used regularly and exclusively as (1) a principal place of business for any trade or business of the taxpayer or (2) as a place of business which is used to meet with patients, clients, or customers.

If you are an employee, then the use of your home must be for the convenience of your employer. You may also be able to deduct expenses for a separate free-standing structure, such as a studio or garage if you use it exclusively and regularly for your business. Exclusive use means just that. You must use a specific part of your home only for business.

CONTACT US: Tax planning is just as important as tax compliance, whether yours is a closely held business run from the home, or a complex corporation headquartered in a high rise. Let our professionals assist you with all your accounting and business advisory needs. Contact Michelle Shulman, CPA, Senior Manager of Tax, at 561-367-1040 or mshulman@dbllp.com for more information regarding our value proposition.