Take advantage of a new law for simplified home office tax deduction.
There's good news for small-business owners who keep home offices and wanted to take advantage of the home office tax deduction when filing their taxes. Beginning on Jan.1, 2013, the Internal Revenue Service has announced new home office deduction rules that will simplify the method of computing the home office deduction. This will be available to business owners that are homeowners or renters, as well as to some employees, that meet the standards under Internal Revenue Code 280. This is welcomed relief from the detailed bookkeeping previously needed to take this home office tax deduction and the recapture of depreciation that results from using the regular method.
IRS Code Section 280A(c)(1) permits a taxpayer to deduct expenses that are allocable to a portion of the dwelling unit that is exclusively used on a regular basis (A) as the taxpayers principal place of business for any trade or business, (B) as a place to meet with the taxpayers patients, clients, or customers in the normal course of the taxpayers trade or business, or (C) in the case of a separate structure that is not attached to the dwelling unit, in connection with the taxpayers trade or business.
The remainder of IRC 280A also allows you to deduct allocable expenses within the dwelling unit if used on a regular basis for the storage of inventory and product samples, or for providing day care for children, individuals who are 65 or older or those who are physically or mentally unable to care for themselves.
The deductibility is basically limited to the gross income derived from that business or trade less normal business deductions. It cannot create a loss, but unused expenses can be carried forward to future years under the regular method.
There are two additional tests for eligibility if you are an employee and you use a part of your home for business. You must meet the tests noted above, plus your business use must be for the convenience of your employer, and you must not rent any part of your home to your employer and use the rented portion to perform services as an employee to that employer.
The new rules do not change the requirements for eligibility for the home tax office deduction. What they do is offer a simplified method of calculating the home office deduction. The regular method can be complex and burdensome for small-business owners and the IRS and Treasury hope that this new method will relieve the complexity.
Under the regular method:
- The taxpayer computes the percentage of square feet used for businesses as to the total square footage of the dwelling unit.
- Then the taxpayer allocates various allowable expenditures as direct or indirect.
- The indirect are then multiplied by the business use percentage.
- This number is added to the depreciation expense that must be calculated for the building (less the amount allocated for land).
- That depreciation expense is added to the calculated expenses in order to get the total deduction.
Where you calculate the business percentage of your mortgage interest and real estate taxes, the nonbusiness use portion then gets reported on your Itemized Deductions, Schedule A. You will need to keep those back up documents to substantiate the expense. Any unused home deduction expense due to income limitations can be carried forward to subsequent years. As if that wasnt enough, when you go to sell your primary residence, you will have a recapture of the depreciation expense that you have taken and will be taxed on that gain upon the sale of the house. It is not included in the allowable exclusion from tax on a primary residence. There is an entire IRS Publication 587, Business Use of Home, that explains the complicated rules, and you also must file a separate form 8829, Expenses for Business Use of Your Home, with your personal tax return. Like I said, accounting for the expense can be complicated and burdensome.
About the author
Sandra Napoleon-Hudson is the managing member of Sandra Napoleon-Hudson CPA LLC, based in Atlanta. Her expertise includes multi-state taxation for corporations, partnerships and individuals, business consulting, sports and entertainment taxation and IRS representation. As a former partner of a New York firm, she appeared frequently on television and in print media.Website