If you’re one of the approximately 3.4 million U.S. taxpayers who claim a home office deduction on your tax return, you may find the calculations a bit easier going forward.
Earlier this year, the IRS announced a simplified option also known as the “safe harbor” option, for calculating the home office deduction. You can use the new option in tax years that begin on or after January 1, 2013.
Making it Easy
Under the simplified option, you multiply the actual square footage within your home that’s used for your business by the prescribed rate of $5 per square foot, up to a maximum of 300 square feet. Thus, the deduction is effectively capped at $1,500 per year, although the IRS may change the $5 per square foot rate in the future.
The new method is optional. If you prefer, you can continue to use the traditional method, calculating your actual home office expenses, such as the portion of utilities and repairs allocable to your home office. You can use either method for any tax year. However, once you choose a method for a particular year, you cannot change it.
Vive La Difference!
The simplified option differs from the regular method of calculating a home office deduction in several ways.
Under the simplified option, home-related itemized deductions that previously were split between Schedule A (“Itemized Deductions”) and Schedule C (“Profit or Loss From Business”), such as property taxes, now generally are claimed on Schedule A. In other words, these expenses are not allocated between personal and business use, as they are with the regular method.
In addition, the simplified option does not allow a separate depreciation deduction for the portion of your home that’s used for business. But you can still deduct business expenses unrelated to your home office space (such as marketing expenses) and direct home office expenses (such as a business-only phone line and office supplies).
If you are self-employed, the amount you claim under the simplified option cannot exceed the gross income from your business, less any expenses. Moreover, you cannot carry forward any unused portion of the deduction to a future year. This differs from the regular method, which does allow a carryforward.
If you’re an employee, whichever method you use, you’ll enjoy a tax benefit only if your home office deduction, plus your other miscellaneous itemized deductions exceed 2% of your adjusted gross income.
Qualifying for the Deduction
The simplified option does not change the criteria that determine whether you can claim a home office deduction. The deduction generally is allowed only when you use a portion of your home exclusively and on a regular basis for business purposes.
In addition, if you’re self-employed, your home office generally must be your company’s principal place of business, although you may also conduct business elsewhere. If you are an employee, your use of the home office must be for your employer’s benefit.
Which is Better?
The simplified option makes calculating the home office deduction easier, but, depending on your situation, you might save more taxes by sticking with the regular method. Your tax advisor can provide insight and information and help you determine if the simplified option is right for you.
Sidebar: Home Office Deduction Just One Potential AMT Trigger
The alternative minimum tax (“AMT”) is a separate tax system that doesn’t allow certain deductions and that treats some income items differently. If your AMT liability exceeds your regular income tax liability, you must pay the AMT.
For employees who qualify for the home office deduction, that deduction can trigger the AMT. How? It’s a miscellaneous itemized deduction subject to the 2% floor (see main article), and such deductions are not allowed for AMT purposes. Professional fees, investment expenses and other unreimbursed employee business expenses are additional miscellaneous itemized deductions subject to the floor.
Other deductions that can trigger the AMT include:
- State and local income taxes or state and local sales taxes
- Property tax
- Interest on home equity debt not used to improve your principal residence
Fortunately, the AMT may now be less of a threat because higher AMT exemption amounts, as well as inflation-indexing of the AMT brackets, have been made permanent.
Have questions? Contact your Buchbinder executive.