IRS Home Office Deduction, A Simplified Option
Simplified Option for a Complex Deduction
Many taxpayers that work at home have been hesitant to take the home office deduction for 2 reasons. First, many feel that taking the home office deduction raises an IRS red flag and puts their return at risk for greater scrutiny or an audit. Second, the record keeping and calculations often didn't make it worth the effort for a relatively small deduction.
In 2013, that changed. The IRS added a Simplified Option making it easier for taxpayers that use their homes for small part-time businesses or even full-time jobs to claim the deduction. In the past, the IRS seemed to discourage taxpayers from claiming the home office deduction. Now, they are almost encouraging it.
What Hasn't Changed
The new simplified option for claiming the home office deduction still requires that a portion of the taxpayer's home be used exclusively and on a regular basis for business purposes. If you are a free lance writer, you probably can't claim your couch or living room. If your kids use the computer in the room to do homework or your wife does scrap booking in the room when you are not there, you can't claim the room.
Not all activities qualify as a business, at least in the eyes of the IRS. What you claim is a business, the IRS may see as a hobby and significantly change your deductions, including this one.
Remember: exclusive, regular basis, and for a business purpose to claim the Home Office Deduction.
Tax Prep and Filing:
What Has Changed with the Simplified Option
- The deduction is based on the square footage of the area in the taxpayer's home that is used for business. The standard deduction is $5/square foot (maximum 300 square feet or $1,500 maximum deduction).
- If the taxpayer itemizes, home-related expenses (mortgage interest and real estate taxes) are claimed in full on Schedule A. Personal use versus business use does not have to be apportioned between Schedule A and the business schedule (Sch. C or Sch. F) making the calculations much easier.
- The long term recordkeeping and the calculations are less complex. Since there is no home depreciation with the simplified option, there is no depreciation to calculate, associated records to keep, or recapture of depreciation when the home is sold.
How do the methods compare?
Use of Home
Area of home used regularly and exclusively for business purposes.
Area used for business
Square footage of area used for business (maximum 300 sq. ft)
Calculated percentage of the home used for business
Standard $5 per sq. ft.
Actual expenses from records
Claim full amount of home-related deductions on Sch. A
Apportion home-related deductions between personal (Sch. A) and business (Sch. C/Sch. F)
No depreciation deduction
Depreciation deduction only for portion of home used for business
Recapture of depreciation
When home sold, no recapture of depreciation
Depreciation recaptured with sale of the home
Deduction cannot exceed gross income after expenses for home business subtracted
Carryover to next year
Deduction in excess of gross income is NOT carried over to next year
Deduction in excess of gross income limit MAY be carried over to the next year
Carryover from previous year
If Regular Method used the previous year, loss from previous year may NOT be carried forward
Loss carryover from previous year (Regular Method used) may be claimed. Gross income test must still be met
April 15th is around the Corner!
Picking a Method
- You may choose either method for the current tax year
- Once you pick, you may NOT change the method later in the SAME TAX YEAR
- If you use the Regular Method AFTER using the Simple Option the previous tax year, for this tax year the depreciation deduction must be determined using an Optional Depreciation Table.
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Do You Take the Home Office Deduction?
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Any federal tax or tax planning information provided above or linked to this article is not meant to be specific to any particular individual or situation. Anyone who wishes to apply this information should first discuss it with an accountant or tax professional to determine its appropriateness or how it specifically applies to their unique situation.