New Options for Taking the Home Office Tax Deduction

Even as you gather your documentation to prepare your 2012 tax return, it’s time to look ahead and begin planning your tax situation for the next tax year.

One of the things to consider as you plan for this year is the new option for taking the home office tax deduction.

There are a number of tax-deductible business expenses that you can claim with your home business.  One of those is a deduction for the cost of the space you are using in your home.

If you plan to take the home office tax deduction, you are required to fill out Form 8829, which consists of 43 lines and can include depreciation and carryovers of deductions you haven’t used.  In some cases, the IRS even acknowledges, figuring the deduction can be a bit complex.  Plus, if you make mistakes on this form, it can red-flag your return for an audit.

Recognizing that home offices are becoming increasingly popular for the growing number of self-employed taxpayers, as well as for telecommuters, the IRS has released an optional method of claiming the home office tax deduction.  It comes into effect this year, in 2013, so you will be able to claim it (if you choose) early next year when filing your 2013 tax return.

New Option for Claiming the Home Office Tax Deduction

If you are nervous about filling out Form 8829, or if you have a rather small home office space, you can choose to file a simplified form on the subject.

The straightforward rule allows you to deduct $5 per square foot, up to 300 square feet.  This limit means that there is a $1,500 cap on the tax deduction.

Taking the new form of the deduction includes all of the items normally included on Form 8829, such as utilities, portion of mortgage/rent payment, and other items.

Here is what a recent IRS press release says about depreciation on the home and other items that the home office deduction generally includes:

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

If you have a larger home office space than 300 feet, or if figuring the deduction the “normal” way still provides you with a bigger deduction, you can still use Form 8829.  The new option for claiming the deduction doesn’t replace the old method; it provides an alternative calculation.

Some Rules Remain the Same

When claiming the deduction, some rules are the same as in the past.  If you have business expenses that aren’t related to your home office, the IRS assures taxpayers, you can still deduct them fully.  So, if you have expenses related to advertising, web hosting, or the purchase of equipment, you can use them to offset your income.

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Other rules also remain the same.

The simpler way of figuring your home office tax deduction is still subject to the rules the IRS imposes when determining whether or not your home office space qualifies.

The two main tests of a home office deduction remain:

1. Regular and Exclusive Use:  You need to use your home office space regularly for business use — and the area you deduct must be used exclusively for business purposes.  As a result, my home office deduction only applies to the 30-square-foot area comprising my desk and all-in-one printer.  Even though the space is located in a larger room we refer to as “the office” there are other uses for the room.  Only my desk/printer area is used exclusively for my home business.
   
2. Principal Place of Business:  You also need to show that you use your home as a principal place of business.  The IRS does say, “If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.”  So the idea is that you base operations substantially from your home.

Make sure you take this into account before you claim any deduction for the business use of your home.  Also, consult a tax professional if you are in doubt.

Do you use the home office tax deduction?  What method do you use to claim it?