New Option for Home Office Deductions

In an effort to make things easier for owners of home-based businesses and for some home-based workers, the IRS has announced a new, simpler option for home office write-offs. Effective for tax years beginning on or after January 1, 2013, the new option will allow taxpayers to annually deduct $5 per square foot of home office space up to 300 square feet with a maximum deduction of $1,500.

The IRS stated that the new option will “reduce the paperwork and recordkeeping burden on small business by an estimated 1.6 million hours annually.”

Under the current set of rules, taxpayers are typically required to complete Form 8829, a 43-line form. This often includes complex calculations of allocated expenses, depreciation and carryovers of unused deductions.

While this new option does make it easier to calculate, one disadvantage is the maximum deduction of $1,500. For some taxpayers, it could be more beneficial to use the current rules to receive a larger deduction. Homeowners using the new option will not be able to depreciate the portion of their home used in trade or business, but they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions. Also, under the new rules the deductions will not need to be allocated between personal and business use, as required under the current method. One thing to note is that business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.

The new option for writing off home office expenses will still follow the same strict substantiation or documentation requirements that are currently in place for the existing method, such as the requirement that a home office must be used “regularly and exclusively” for business and that the deduction is limited to the income derived from a particular business. Home-based workers must meet the additional requirement that the home office must be for the convenience of the employer. This new option does not apply to an employee with a home office if they receive advances, allowances or reimbursements for expenses related to the home office by their employer.

Lastly, a taxpayer may elect from tax year to tax year whether they will use the new option or use the existing method by completing Form 8829. Once a taxpayer decides for the taxable year, the choice cannot be changed.

If you would like assistance in determining if you are able to claim a home office deduction and which method is best for you, please feel free to contact me at (805) 963-7811 or eboscacci@bpw.com.