Until recently, the Internal Revenue Service (IRS) had complex filing requirements for self-employed or small business taxpayers interested in taking advantage of the home office deduction. While not getting rid of the old requirements completely, the IRS developed a simplified home office deduction option beginning in the 2013 tax year. This simplified method is an easier way to deduct business expenses incurred while working from home.
This simplified home deduction option does not change the criteria for who may use this deduction. Typically, the home office deduction is used for people who are self-employed and own their own small business, or an employee that works at home for the convenience of his/her employer. If use of a home office is merely convenient to the taxpayer, the IRS will not allow deduction of home office expenses.
For the home office deduction to apply, the home office must meet be 1) the principle place of the business for the tax payer and 2) the home office needs to be used regularly and exclusively for the business.
1) The IRS considers a principle place of business as:
a) Only conducting business out of your home office, or conducting business in your home office more so than other locations where you conduct business.
b) Other factors include relative importance of the activities performed at each location and the amount of time spent at each location.
2) The IRS considers regular and exclusive use of the home office for business as the use of an area solely for your trade or business.
a) This area can be a room or other separately identifiable space. This space does not need to be divided by a partition or marked off
b) This space cannot be used for personal purposes, and cannot be used by your children or other family members for non-business purposes.
Calculating Deduction – Simplified v. Regular Method
Since the requirements for who may claim a home office deduction have not changed, the real difference comes in the calculation. Taxpayers are allowed a standard deduction of $5 per square foot of their home office, with a maximum of 300 square feet. Therefore, the simplified home office deduction method has a maximum cap deduction value of $1,500. With this straight-forward calculation, the burden of paper work and record keeping on the small business or taxpayer will be significantly reduced. This includes eliminating the need to compute your deduction on a Form 8829 and calculating depreciation value of your home, two lengthy filing requirements of the regular home office deduction method.
In addition to the standard deduction amount, a taxpayer may be able to deduct home related itemized deductions for their home office use. Home related itemized deductions may include real estate taxes and mortgage interest. For the home related itemized deductions, you must calculate the percentage of your home that is used as home office.
The IRS recognizes two methods for calculating home office percentage. Taxpayers either have the option of dividing the square footage of the office by the total square feet of the house OR divide the number of rooms used for business by the total number of rooms in the home.
While the regular method required allocating these expenses between home and business use of Schedule A, C, or F, the simplified version allows a tax payer to claim the deductions in full on Schedule A.
It is important to note that the simplified option cannot be used for tax returns 2012 and earlier. For tax years 2013 on, a taxpayer may use either method for any year. However, once a tax payer chooses one method, they may not change methods without IRS consent.
There are further intricacies and exceptions to the criteria listed above for taxpayers. Some of these home office exceptions include taxpayers whose home office is a free standing separate structure, who conduct more than one trade or business at their home, use the home as a place to meet patients or clients, and if your home is being used as a daycare facility for your business.
Given the recent change in the filing requirements, it is best to for someone who is self-employed or a small business owner to consult with a tax attorney to ensure they are maximizing their business deductions. The attorneys at JDKatz, P.C. can help you navigate the IRS deductions available for businesses. If you are interested in speaking with one of our tax attorneys, schedule a free consultation or by call our Bethesda office at 301-913-2948.
More information on the simplified home IRS home deduction method and the business use of the home in general can be found at: http://www.irs.gov/Businesses/Small-Businesses–Self-Employed/Home-Office-Deduction.
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JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.