Many homeowners know that having an office in the house can be a deduction under certain circumstances. Traditionally, if something gets red-flagged for audit of a homeowner’s deductions, it is the one for a home office. Yet, if deducted correctly, it can be as safe a deduction as the more typical ones. Homeowners can deduct a percentage of their mortgage, utilities and home repairs in direct proportion to the amount of their home that is set aside as office space.
For this deduction to work, here are a few guidelines when deducting your home office expenses on your tax return:
· It must be your principal place of business (the main place where you get most of your work done)
· It must be used exclusively for business (No TVs, no video games, no craft corner.)
· It must be regularly used for business
· The size and use claimed needs to be realistic. Six hundred square feet in a 1200 square-foot house may not be realistic.
As of 2013, the IRS has simplified the method of computing business use of your home. The standard method used previously had been complex easily misunderstood by small business owners that felt it was too burdensome and problematic. Also, a reason for the reputation of the deductible has as an audit-magnet. The IRS claims the new simplified option can “significantly reduce recordkeeping burden by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office” in lieu of determining actual expenses. For a full explanation of tax deductions for your home office refer to Publication 587, Business Use of Your Home .
As a homeowner using this new option, you will not be able to depreciate the part of the home you use in your business. Yet, if you are a homeowner who itemizes your deductions, you can still claim mortgage interest, real estate taxes and any casualty losses on their home on Schedule A.
If you use the simplified option, you can write off $5.00 per square foot up to 300 square feet of home-office space. If your home office is more than 300 square feet, or if you want to take a depreciation deduction for the office space, then you will want to use the standard option. And, if you still want to depreciate the office space in your home, you will need to continue to use the standard option for such detailed calculations.
Be aware, when you sell your house, you will have to pay back any depreciation you took and it’s taxed at around 25%. Since the ‘90s, federal tax law has permitted homeowners to exclude from tax up to $250,000 per person in profits from the sale of a personal residence that has been lived in for at least two of the five years prior to its use. However, the space or room in your home that you dedicated to business use and depreciated must be “recaptured” when you sell as it does not qualify for the home sale tax exclusion.
The new home office deduction is simpler but smaller. However, as we’ve seen above, the added savings from keeping the additional records and claiming depreciation may not be worth the effort to hold out for the larger portion from the standard method. The home office deduction is easier to claim for the 2013 calendar year, but you won’t be able to use the simplification until you fill out your tax return in 2014.