By Carla Turchetti
The last time the IRS checked 3.5 million people did enough business at home to claim a home office deduction on their taxes. Since that data was collected in 2010, the number has likely grown and the IRS and the Treasury Department have just announced a change that will make it easier for some taxpayers to claim the home office deduction.
Beginning with the 2013 tax year, for business done this year, the IRS will be offering what it calls a “safe harbor” for the home office deduction. Eligible home-based businesses may deduct up to $1,500 a year by using a formula based on the square footage of the home office space. This will be an alternate to the current method which is the 43-line Form 8829 that requires filers to calculate and substantiate actual expenses related to a home office.
The IRS says it has created the new method for calculating the deduction to reduce paperwork and record keeping for taxpayers with home offices.
With the so-called safe harbor deduction, the home office user will multiply the measurements of the office, up to 300 square feet, by $5 a square foot to arrive at the amount of the deduction.
Under the new method taxpayers won’t be able to depreciate a portion of the home used for business but they will still be able to deduct mortgage interest and real estate taxes on the home and deduct other expenses like office supplies.
Qualifying home offices include:
- Offices used regularly and exclusively for business.
- Homes used for daycare businesses.
- Office space set aside exclusively for meetings with clients, customers or patients.
- Office space that houses inventory or samples in the sole location of the business.
- Separate structures on the taxpayer’s property.
The IRS is accepting public comment on these changes and it isn’t clear yet if the safe harbor deduction will be recorded on the same Form 8829 that is now used or if it will have its own form.
Filers should look at the advantages of itemizing versus using the single deduction. One quick test is to multiply your home office square footage by $5 a square foot and see where that stacks up against your previous home office deductions. You don’t have to commit permanently to one method or the other. There won’t be any penalty for choosing alternate methods in different tax filing years.
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