Simplified Home-Office Deduction Available

Beginning with your 2013 tax return you have a new option available for calculating the Home-Office deduction – based solely on the square footage of the dedicated space used for the home office.

Instead of having to maintain records that are directly and indirectly associated with your home office, you can use the simplified method, which applies a flat $5 rate per square foot to the home office space, up to a maximum of $1,500.

The record-keeping and tax preparation simplification is very beneficial: Form 8829 (the usual home-office deduction form) can cause a lot of headaches to prepare, especially if you have more than one home office and you itemize your home mortgage interest and real estate taxes.  For a single home office your tax preparation software will do much of the work for you, but complications like a second home office (not that uncommon in these days of officing-at-home) it can be complex.

Unfortunately, in my experience working with tax returns so far this season, it seems that the simplified method often results in a smaller home-office deduction than the old method.  With the simplified method you get the option to deduct your full real estate taxes and home mortgage interest above and beyond the home office deduction, whereas the old method required you to apportion these expenses between business and personal.  If the new method appeals to you, it is much simpler than gathering all the records and figuring out how to correctly fill out the forms.

The IRS recently issued their a news release, IR-2014-24, which details information about the simplified deduction.

Reminder To Home-Based Businesses: Simplified Option for Claiming Home Office Deduction Now Available; May Deduct up to $1,500; Saves 1.6 Million Hours A Year

Washington – The Internal Revenue Service today reminded people with home-based businesses that this year for the first time they can choose a new simplified option for claiming the deduction for business use of a home.

In tax year 2011, the most recent year for which figures are available, some 3.3 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction) totaling nearly $10 million.

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.

The new options is available starting with the 2013 return taxpayers are filing now.  Normally, home-based businesses are required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions.  Instead, taxpayers claiming the optional deduction need only complete a short worksheet in the tax instructions and enter the result on their return.  Self-employed individuals claim eht home office deduction on Schedule C Line 30, farmers claim it on Schedule F Line 32, and eligible employees claim it on Schedule A Line 21.

Though some 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.

Long-standing restrictions on the home office deduction, such as the requirement that a home office 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.

Further details on the home office deduction and the new option can be found in Publication 587, posted on www.IRS.gov.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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