New Home Office Deduction Loopholes You Need to Know for 2013

Gone are the days when home office deductions were an IRS “red flag”. In fact, the IRS has actually made it easier than ever for some taxpayers to claim home office deductions. For the first time ever, taxpayers now have an option in choosing how to deduct their home office expenses. Starting in 2013, taxpayers can now choose between the regular method and the new “simplified” method when calculating their home office deductions. First, it is important to note that the criteria in determining who may claim a home office deduction did not change. Those rules still apply. Essentially, there are two rules that must be met in order to claim a home office deduction.

First, you must use part of your home exclusively for business purposes. For example, having an area in your home where you only work on business activities qualifies. On the other hand, if you use your dining table to work from every day, this would generally not qualify as a home office because your dining room would also be the place where you eat.

The second rule that must be met in order to be eligible for a home office is that this must be your principal place of business. One of the common mistakes we see is people who don’t take a home office deduction if they have another office that they can go to from time to time. Keep in mind that you can have other offices and still claim a home office deduction. Your home just needs to be your primary place of business.

Once you meet the two rules above, you can now look at whether the regular method or the new simplified method would give you the best tax write-offs. The regular method of a home office deduction is to first determine the actual expenses of your home office. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation to name a few. Generally, when using the regular method, deductions for a home office are based on the percentage of your home that you use for business. This can be determined by either counting the number of rooms in your home to how many rooms are in use for your business or by comparing the square footage of the home office to the entire home.

If you are not someone who keeps good records, this can potentially cause some problems. Imaging the amount of work you need to do to go through an entire year’s worth of receipts and bank statements to add up your mortgage, utilities, cleaning fees, repairs, etc. One of the benefits of the new simplified method is that rather than keeping receipts and calculating the actual expenses, you can instead use the IRS standard $5 per square foot to determine your home office deduction. In addition to the simplicity of this new method, there are also a few other benefits that make this new home office calculation attractive to some taxpayers.

First, if you are a home owner, your home office deduction takes away how much you can deduct on your Schedule A itemized deductions. This is because the portion of your mortgage interest and property taxes that you deduct as a home office expense reduces what you can deduct on your itemized deductions for these same expenses. Using the simplified method on the other hand, allows you to deduct the standard $5 per square foot and allows you to deduct your full mortgage interest and property taxes on schedule A itemized deductions. In some instances, this could mean you are double-dipping on that same expense.

The second benefit of the new simplified home office deduction calculation is depreciation. Under the regular method, you may need to pay taxes when you later sell your home where depreciation was taken on as part of the home office deduction. With the simplified method, you would not need to pay taxes on any recaptured depreciation because technically, you didn’t take depreciation in the first place.

Another great strategy to note is that you are not stuck with one method versus the next. For example, your CPA may run the numbers for you and determine that the regular method is best for 2013. In 2014 they may run the numbers for you and then find out that the simplified method is better in 2014. Generally, you are allowed to change methods from year to year without any problems. Believe it or not, the home office deduction is one of the most commonly missed tax breaks for business owners as well as employees. Now that the IRS has officially made it easier and more beneficial, be sure to take advantage of these write-offs to keep more of your bottom line.

Copyright © 2013 by Amanda Y. Han, CPA
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