Consider making your tax life easier with the simplified (safe harbor) home office deduction offered by the IRS as an alternative to the traditional calculation. This new method is available starting with your 2013 tax return.
Deducting the costs of your home office traditionally has required taking into account the various home expenses that could be allocated to the square footage used for your business. Examples include utility bills, cleaning, mortgage interest, property taxes and depreciation.
Several of the costs related to taking a home office deduction introduce additional complexity to your tax life. Depreciation on your home opens the door to recapture income when you sell your residence. This may be a surprise if you were planning on using the home sale exclusion to avoid tax on selling your primary residence. Mortgage interest and property taxes are otherwise itemized deductions. You were previously required to allocate those costs between the home office deduction and our itemized deductions.
Under Revenue Procedure 2013-13 a taxpayer who qualifies for a home office deduction can elect a simplified method where they multiply the number of square feet used in their home office by $5 per square foot to determine their deduction without referencing actual costs. The total deduction is limited to a space of 300 square feet or $1,500.
Two key simplifications in this method are
- No depreciation is included in the deduction
- Mortgage interest and property taxes are moved back to being entirely deductible as itemized deductions on Schedule A.
The simplified deduction cannot exceed your business income.
The complete calculation along with information on qualifications can be found in Publication 587.
Please contact me if I can assist in determining your qualification for and deduction of home office expenses in your business.