Home Office Deduction Simplified... Sort of

Every now and then the government does actually simplify something. On Tuesday, January 15, 2013 the IRS released Revenue Procedure 2013-13 which gives you an optional method to calculate the amount of the deduction for expenses for your business use of your residence beginning with the current tax year.

As you read about this new home office deduction option, you may notice that it is very similar to the options you have for deducting business use of your automobile. One method is easy and based on a constant deduction the IRS provides the other method requires that you keep detailed records but the benefit may well be a higher deduction.

New Option Beginning with 2013

Beginning this year, 2013, you can elect to calculate your home office deduction by multiplying the allowable business square footage by $5.00. The allowable square footage is the portion of the house used in a qualified business use, but not to exceed 300 square feet. The maximum you can deduct annually under this new “safe-harbor” calculation method is $1,500. The IRS may update the $5.00 per foot allowance from time to time.

Electing the safe-harbor is done on your original tax return (but only if you file it on time, including extensions of time to file) instead of on Form 8829, Expenses for Business Use of Your Home, which is used for the actual expense method. You are allowed to change how you calculate your home office deduction from year-to-year so each year you can look to see what works best for you. However, once you make the election any one tax year it is irrevocable for that year.

No depreciation is allowed for the years in which you have elected to use the safe harbor, but it is allowed in the years in which you use the actual expense method (the “old” more detailed method).

There Are Details For Which To Plan

To use the sale-harbor method, you must continue to satisfy all the other usual requirements for a home-office deduction, including the requirement that the space in your residence used as an office be used exclusively for that purpose and the limitation that, if you’re an employee, you qualify for the home-office deduction only if your office is for the convenience of your employer.

Your deduction under the safe-harbor method can’t be more than the amount of gross income received from the qualified business use of your home minus your business deductions, and you cannot carry over any excess to another tax year. If you use the actual expense method for calculating your deduction and your deduction winds up being limited by the gross income in that year, you can deduct this amount in the next year you use the actual expense method, but cannot use the disallowed amount in a year you elect the safe harbor. This limit on carryovers for the safe-harbor method means you must be careful before electing it to be sure you will not lose any of your deduction.

What If You Share Your Home?

What if you’re sharing your home? If you’re sharing a home (for example, roommates or spouses, regardless of filing status), if otherwise eligible, you may each use the safe harbor method provided by the revenue procedure, but not for qualified business use of the same portion of the home. The revenue procedure also contains detailed rules for use of your home for part of the year. It allows you who have a qualified business use of more than one home for a year to use the safe harbor for only one home, but it permits you to use the actual expense method for your other homes.

Give Us a Call for Help

While this may not on the surface seem to be that much easier from a tax planning and preparation process, it does provided more options for planning which in the world of tax reduction, is always a good thing.

To review your options and what method may work best for you give us a call or drop us an email. We’re here to help.

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