The IRS has announced a new simplified way for home-based businesses to calculate the deduction for the home office space, beginning with 2013 tax returns. The IRS calls this a "safe harbor. A form for this simplified option has not yet been announced.
The IRS says:
Home Office Space Deductions
Currently (through 2012), home business owners were required to complete Form 8829 to calculate the home business space deduction. The form included:
- Several ways to calculate home business space, as a percentage of the home's overall square footage or as a percentage of the number of rooms
- Deductions for direct expenses, such as paint, wallpaper, and other expenses directly related to the business space. These expenses could be deducted at 100%. and
- Indirect expenses, such as utilities, rent, or real estate taxes. These indirect expenses were required to be taken against the calculated space, usually a percentage of home square footage. So, for example, if the home business space is 10% of the home's square footage, then 10% of the total of these indirect expenses could be deducted.
How the alternative adjustment works
The alternative adjustment is calculated by multiplying the allowable square footage of the home business space by a prescribed rate. The allowable square footage is the portion of the home that qualifies as being used "regularly and exclusively" for business purposes, but not more than 300 square feet. Hence, the current deduction limit of $1500. The rate as announced in January 2013 is $5; this rate will be adjusted by the IRS from time to time.
- You can use the simpler safe harbor calculation or the current computation using Form 8829, whichever results in a larger deduction.
- If you use the alternate method, you cannot deduct any actual expenses related to the qualified business use of that home for that taxable year. This would include mortgage interest and property taxes.
- If you use the simplified option, you cannot depreciate the portion of your home used for business purposes.
- You must still adhere to the requirements that the business space be used "regularly and exclusively" for business purposes. If both of these requirements are not met, the space cannot be deducted as a business expense.
- Home business owners using the new option cannot depreciate the portion of their home used for business purposes. But mortgage interest, real estate taxes, and casualty losses can still be claimed through the personal tax return on Schedule A. These deductions do not need to be allocated between personal and business use, as is required under the regular method.
- Other normal business expenses that are not related to the home business, such as advertising, supplies, and wages, are still fully deductible, in the same way as these expenses are deductible to all non-home-based businesses.
- The amount of the deduction cannot exceed the net income of the business; in other words, the deduction cannot be used to create a business loss for tax purposes
- If you have more than one home-based business using the same space, you must use the simplified alternative for all businesses.
Should I take the simplified deduction?
Many home business owners don't take any deduction for the use of their home office, because (a) the paperwork is so complicated, and there is a risk of making a mistake, and (b) they believe that taking this deduction results in an increased risk of an audit. While the simplified option may not provide as high a deduction, it certainly simplifies the process and it might make sense to take this option if the deduction amount is close to the amount generated by Form 8829.
DisclaimerIt is not the purpose of this article or this website to provide tax or legal advice. Before you consider whether to take a home office space deduction, or which deduction to take, discuss your options with your tax advisor. Each circumstance is different, and it is not the purpose of this article or this site, to provide tax or legal advice.
Read the announcement from the IRS about this new option for home business owners.
Information was obtained from IRS Revenue Procedure 2013-13 (January 15, 2013)