WASHINGTON — The Internal Revenue Service today announced a simplified option that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes.
In tax year 2010, the most recent year for which figures are available, nearly 3.4 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction).
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.
“This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction,” said Acting IRS Commissioner Steven T. Miller. “The IRS continues to look for similar ways to combat complexity and encourages people to look at this option as they consider tax planning in 2013.”
The new option provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming the optional deduction will complete a significantly simplified form.
Though 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.
Current restrictions on the home office deduction, such as the requirement that a home office must 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.
The new simplified option is available starting with the 2013 return most taxpayers file early in 2014.
My take on this is that this safe harbor approach is very misleading. First, you need to meet all of the home office rules anyway, such as using your home as your principal place of business or place for storage, regularly and exclusively for business. Thus, I don’t see the big deal about it. Yes, the tax form that you fill out will be a bit easier when computing the home office deduction. Big deal!
Second, the safe harbor approach limits your deductions to $1,500 per year per person. The actual approach in most instances will be at least 50% more based on what I have seen in the past. However, you will need to reduce your home basis by depreciation taken with the actual approach.
I should note that the safe harbor approach doesn’t apply if you are getting reimbursed from your company. Also, if you and your spouse each can claim a home office deductions for different parts of the home, you can each use the safe harbor and get a max deduction of $1,500 for each of you under the safe harbor approach.
In addition, you can’t take depreciation on your home. Finally, if the home office deduction, using the actual method, exceeds your net income from your business, you can carry over any used deductions. This isn’t true for the home office deduction if the safe harbor approach is used.
I should note that the safe harbor approach can be used in one year and changed in another. It is based on a yearly election.
Bottom line: Yes, it will be easier to compute the home office using the safe harbor method. You don’t need to make an allocations of expenses or use the depreciation table or keep track of any carried over deductions that weren’t useable. You are also probably shafting yourself out of a substantial amount of deductions. I guess you need to have your accountant compute the deduction either way, but this defeats the benefit of providing the safe harbor approach to taxpayers.