On January 15, the IRS announced a new optional method of calculating the home office deduction. Normally, home office deductions such as utilities, repairs, homeowners insurance, depreciation, mortgage interest, and real estate taxes are allocated to the home office and the rest of the home based on the square footage of the home office.
Beginning in 2013, the home office deduction can be calculated by multiplying $5 by the square footage of the home office. The maximum square footage of the home office under this method is 300 square feet, and the maximum home office deduction will therefore be $1,500. Of course, taxpayers still have the option of calculating the home office deduction under the actual expenses method if it results in a larger deduction.
Taxpayers who use the simplified method may still fully deduct mortgage interest, real estate taxes, and casualty losses as itemized deductions. Additionally, businesses expenses such as advertising, wages, and supplies are still deductible. Depreciation may not be claimed.
Other requirements of the home office deduction must still be met. These include the home office’s regular and exclusive use as:
- a principal place of business
- a place where you meet with customers or clients
- a place that is connected with your business if your home office is in a separate structure
The home office deduction is still limited to the income from the business for which the home office is used (i.e., home office deductions cannot reduce income below zero and generate a loss). Under the actual expenses method, disallowed deductions are allowed to be carried forward. However, under the simplified method, disallowed deductions may not be carried forward.
Taxpayers may alternate between the simplified method and the actual expenses method on a year-to year-basis. However, any disallowed losses in a year that taxpayers used the actual expenses method may not be used in a later year where the taxpayer uses the simplified method.
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Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230