Believe it or not, there may be some good news for business taxpayers. Starting in the tax year 2013 (for returns filed in 2014), a taxpayer may now use a simplified (safe harbor) option when figuring the deduction for business use of the home.
As outlined in Revenue Procedure 2013-13, you may choose either the simplified or the regular method for any taxable year. Once you have chosen a method for a taxable year, you cannot change methods for that year.
This option is available for both self -employed individuals and employees that meet the qualifications for the use of the home office.
Regardless of the method chosen, the are two basic requirements for your home to qualify as a deduction:
1. Regular and Exclusive Use. You must regularly
use part of your home exclusively for conducting business.
Occasional or incidental use does not meet the regular use
test even if the area is used for no other purpose. There is no
requirement that the business portion of a room be partitioned
but any personal use of the (business) space no matter how small
disqualifies business use
2. Principal place of business. You must show
that you use your home as your principal, place of business.
Administrative use will qualify a home office as long as it is used
regularly and exclusively and there is no other fixed location
where you conduct business.
Additionally if you are an employee, your business must be for the convenience of your employer and you cannot rent any part of your home to your employer.
The simplified option is based on the square footage of your qualified home business use. The deduction allowed is $5 per square foot up to a maximum of 300 square feet ($1,500).
Allowable home-related itemized deductions such as mortgage interest and real estate taxes may be claimed in full on Schedule A. There is no depreciation deduction nor is there recapture of depreciation when the home is sold. The deduction cannot exceed gross income less expenses and there is no carryover of the excess.
Under the regular method, the taxpayer must determine the actual expenses of their home office. This would include mortgage interest, real estate taxes, utilities, insurance , repairs, and depreciation then allocate the percentage of the home devoted to business use.
The mortgage interest and real estate taxes are then allocated between the home office and the itemized deductions. Depreciation must be recaptured upon sale of the home. Deductions have similar limitations to the simplified method but excess deductions can be carried over.
For years taxpayers and tax professionals have struggled with the record keeping required to claim the home office deduction.
When comparing the two methods, the regular method may, in my opinion, yield a greater deduction. But with this new provision, it may be easier and cheaper to use the simplified method.
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