The IRS has an alternate way for you to calculate your home office deduction. Now, instead of keeping track of all of your household expenses for maintaining your home, such as utilities, insurance, maintenance, and lawn care, you can take a flat amount per square foot of office space. This can be a huge benefit to those of you who do not enjoy, nor excel in maintaining documentation, especially when the tax benefit often ends up being minor.
Here’s how the deduction works. You can take $5 per square foot for up to 300 square feet for a maximum deduction of $1,500. That’s it! You can decide in 2013 whether you want to use this simplified deduction method or continue to use the actual expense method. If you switch to the simplified method in one year, you cannot amend your return to take the actual cost method. However, you can switch methods from year to year.
What are the biggest advantages to the simplified method of calculating your home office deduction?
- The only documentation you have to keep is the square footage of your home office.
- The simplified deduction does not allow you to depreciate your home office, which means if you sell your home at a gain, all or most of it is exempt from tax. Otherwise, the gain applicable to your home office is taxable if you have been depreciating it.
- When you take the simplified home office deduction, you can still take your mortgage interest and property tax deduction, the full amounts, on your itemized deductions (Schedule A). Therefore, you do not have to allocate these amounts between Schedule A and Schedule C, which makes tax preparation easier.
What are the downsides of the simplified method of calculating your home office deduction?
- The simplified home office deduction may be less than the home office deduction based on actual expenses. If you have business income, your home office deduction reduces that income and the associated self-employment taxes. That can increase your tax burden significantly.
- If you are subject to AMT (alternative minimum tax), you may not get any benefit from your property tax deduction on Schedule A. Part of your mortgage interest deduction may also be wiped out by AMT. You may receive a lot more benefit from taking the portion of those deductions applicable to your home office against self-employment income, where you definitely receive a benefit.
- If you sell your home at a loss, the loss does not give you any tax benefit except for the portion of the loss applicable to your home office if you’ve been depreciating it. You cannot depreciate your home office under the simplified method, so you may miss out on a tax benefit.
- If you switch methods between simplified and actual cost, and are depreciating your home office in some years but not other years, you could create a bigger recordkeeping mess for calculating the basis of your home and the portion subject to gain or loss upon sale.
As with all tax issues be sure to ask your income tax preparer for help on which method is better for you. Whether you choose the home office deduction using the simplified method or the actual cost method, some things do not change. The home office deduction is subject to the same rules as always, and you can still fully deduct any direct expenses related to your home office, such as supplies and equipment.
It is great that the IRS has devised a simpler way to take the home office deduction. Just be careful before you make a change to ensure that you will be able to maximize the benefits of your home office deduction.