New Simplified IRS Rules For Home Office Tax Deductions

Tax season is fast approaching, and those of you with home offices know how hard it is to calculate your residence-based business deductions under current tax laws.

But there’s good news: After acknowledging how “complex and burdensome” the necessary recordkeeping was. The IRS just recently amended them to add an easy to calculate safe harbor method. Here’s what you need to know:

• Filers can now determine their allowable deduction by multiplying the square footage of the portion of their residence allocated for business purposes by $5.00 up to a maximum 300 square feet ($1,500) for the taxable year starting January 1, 2013.

• “Allocated for business purposes” is defined as: a portion of a owned, rented, or leased dwelling that is used exclusively for business purposes, a place to meet with patients, clients, customers in the normal course of business, a separate structure used in connection of trade or business, or space used on a regular basis for the storage of inventory or product samples used for your business.

• You can still use the old $280 method for calculating your allowable deduction. You can switch back and forth between methods from taxable year to taxable year as you see fit.

• This doesn’t apply to you if your business pays you advances, allowances, or reimbursements for your home office.

• You can’t declare a deduction for an amount larger than the gross income of the business associated with your home office makes for the taxable year.

• Spouses, roommates, or partners are each eligible for their own deduction for a home office up to 300 square feet.

• If the allotted space for your business-associated allotment fluctuates from month to month, provide your average for the year. For example, if you have a home office for the first six months of the year that’s 200 square feet, your calculation should look like this: (200 + 200 + 200 + 200 + 200 + 200 + 0 + 0+ 0+ 0+ 0+ 0)/12 months) x $5.00 = $500.

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Comparison of methods

Simplified Option Regular Method Deduction for home office use of a portion of a residence allowed only if that portion is exclusively used on a regular basis for business purposes Same Allowable square footage of home use for business (not to exceed 300 square feet) Percentage of home used for business Standard $5 per square foot used to determine home business deduction Actual expenses determined and records maintained Home-related itemized deductions claimed in full on Schedule A Home-related itemized deductions apportioned between Schedule A and business schedule (Sch. C or Sch. F) No depreciation deduction Depreciation deduction for portion of home used for business No recapture of depreciation upon sale of home Recapture of depreciation on gain upon sale of home Deduction cannot exceed gross income from business use of home less business expenses Same Amount in excess of gross income limitation may not be carried over Amount in excess of gross income limitation may be carried over Loss carryover from use of regular method in prior year may not be claimed Loss carryover from use of regular method in prior year may be claimed if gross income test is met in current year