IRS eases burden of home office deduction calculation

New option cuts need to file 43-line form with expenses, depreciation, carryovers

Jan 17, 2013 @ 3:23 pm

By Liz Skinner

practice management, IRS, home office
+ Zoom

Advisers who work from home, listen up. Uncle Sam has created an easier method for Americans who work at home to deduct home office expenses on their taxes, a task that previously required complex calculations.

The Internal Revenue Service said Tuesday that people who work from home or run a small business from home and have a “qualifying home office” can deduct up to $1,500 a year. That's based on an allowance of $5 per square foot of home office space on up to 300 square feet.

This option — easier than filling out the current 43-line Form 8829 that requires burdensome estimates of allocated expenses, depreciation and carryovers of deductions not taken in previous years — will be available beginning in the 2013 tax year. About 3.4 million taxpayers claimed the home office deduction in 2010.

“This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction,” acting IRS commissioner Steven Miller said in a statement.

The government projects this change will save taxpayers 1.6 million hours a year in tax prep time. Homeowners can still use the traditional method, and in fact, it might make sense for those with especially large offices in their homes.

Kurt Laubinger, who runs his advisory firm Potomac Wealth Management LLC, out of his home, said he has not claimed the home office deduction in the past. However, he will consider it now that the new safe harbor rules are in place.

“I’ve never claimed a home deduction because I heard from someone at the IRS that the home office deduction is one of the biggest red flags for an audit,” Mr. Laubinger said. “I’m always by the book with my taxes, but avoiding an audit is certainly a preferable solution.”

The taxpayer's home office still will have to meet certain requirements, including that it must be used regularly and exclusively for business and that the amount of the deduction isn't more than the gross income from that business in that year, the IRS said.

Homeowners who choose to use the simpler method won't be able to deduct any portion of actual expenses related to the business use of the home that year, such as homeowners insurance, utilities or repairs. The new method also will not allow for a depreciation expense for the part of the home used in the business, the IRS said.

Taxpayers will still be able to claim mortgage interest, real estate taxes and casualty losses on the home as itemized deductions. A husband and a wife each will be allowed to use this safe harbor method for calculating an office deduction for up to 300 square feet of different parts of the home, the IRS said.

The IRS is accepting comments on the change through April 15, though any changes would not be implemented until the 2014 tax year, according to an IRS statement.

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