If you’re one of the approximately 3.4 million U.S. taxpayers who claim a home office deduction on your tax return, you may find the calculations a bit easier going forward.
Earlier this year, the IRS announced a simplified option, also known as the “safe harbor” option, for calculating the home office deduction. You can use the new option in tax years that begin on or after Jan. 1, 2013.
Making it Easy
Under the simplified option, you multiply the actual square footage within your home that’s used for your business by the prescribed rate of $5 per square foot, up to a maximum of 300 square feet. Thus, the deduction is effectively capped at $1,500 per year, although the IRS may change the $5 per square foot rate in the future.
The new method is optional. If you prefer, you can continue to use the traditional method, calculating your actual home office expenses, such as the portion of utilities and repairs allocable to your home office. You can use either method for any tax year. However, once you choose a method for a particular year, you can’t change it.
Vive la Difference!
The simplified option differs from the regular method of calculating a home office deduction in several ways.
Under the simplified option, home-related itemized deductions that previously were split between Schedule A (“Itemized Deductions”) and Schedule C (“Profit or Loss From Business”), such as property taxes, now generally are claimed on Schedule A. In other words, these expenses aren’t allocated between personal and business use, as they are with the regular method.
In addition, the simplified option doesn’t allow a separate depreciation deduction for the portion of your home that’s used for business. But you can still deduct business expenses unrelated to your home office space (such as marketing expenses) and direct home office expenses (such as a business-only phone line and office supplies).
If you’re self-employed, the amount you claim under the simplified option can’t exceed the gross income from your business, less any expenses. Moreover, you can’t carry forward any unused portion of the deduction to a future year. This differs from the regular method, which does allow a carryforward.
If you’re an employee, whichever method you use, you’ll enjoy a tax benefit only if your home office deduction plus your other miscellaneous itemized deductions exceed 2% of your adjusted gross income.
More Calculation Considerations
Keep in mind that, if you begin using a home office partway through the year, you’ll need to calculate what’s known as the “average monthly allowable square footage.” Say you start a business on Aug. 1 and use 300 square feet of space. The allowable square footage would be 125, or 300 square feet divided by 12 months in a full year multiplied by the five months of August to December: (300/12) × 5 = 125.
In addition, if you and your spouse use different areas of the home for separate businesses, you each can use the simplified option — but you must use it for all your businesses, taking a deduction for only up to 300 square feet total, reasonably allocated between your businesses.
Qualifying for the Deduction
The simplified option doesn’t change the criteria that determine whether you can claim a home office deduction. The deduction generally is allowed only when you use a portion of your home exclusively and on a regular basis for business purposes.
In addition, if you’re self-employed, your home office generally must be your company’s principal place of business, although you may also conduct business elsewhere. If you’re an employee, your use of the home office must be for your employer’s benefit.
Which is Better?
The simplified option makes calculating the home office deduction easier, but, depending on your situation, you might save more tax by sticking with the regular method. Your tax advisor can provide insight and information and help you determine if the simplified option is right for you.