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Home Office Deductions- A New Simplified Calculation

January 22, 2013

IRS provides taxpayer with simpler alternative for calculating their home office deductions.

The IRS recently provided taxpayers with a new simplified alternative for calculating their home office deductions. The election to use this new simplified calculation is available beginning with the 2013 tax year. Detailed information on the simplified calculation can be found in Revenue Procedure 2013-13. It is important to note that this Revenue Procedure did not alter the eligibility requirements for claiming the home office deduction.

Under the new simplified calculation:

  • A taxpayer’s home office deduction is calculated by multiplying the square footage of the home office by a rate of $5 per square foot. The maximum allowable square footage per office is limited to 300 square feet or a maximum deduction of $1,500 (300 x $5) for each home office.
  • There is no need to identify, calculate or substantiate the actual expenses attributable to the home office.
  • Taxpayers have the ability to make the election on an annual basis and may alternate between the older established methodology and the new simplified calculation on a year by year basis.
  • Mortgage interest and real estate taxes are fully deductible as personal itemized deductions on Schedule A. There is no requirement to prorate these deductions between the home office and personal residence. While there is no loss of deductions, taxpayers claiming the home office deduction as sole proprietors may find that their adjusted gross income is higher using the new simplified calculation because no portion of the real estate taxes and mortgage interest are deducted on Schedule C. This may have a negative effect on self employment tax liability and deduction phase out calculations. In addition, a larger portion of real estate taxes will be subject to possible disallowance under the alternative minimum tax (AMT).
  • Depreciation of the home office is not allowable. A taxpayer using the new simplified calculation may be able to decrease the amount of gain and depreciation recapture attributable to the home office that might have otherwise been recognized on the later sale of the residence under the older established methodology.
  • The home office deduction, computed using the new simplified calculation, is still subject to the business income limitation. Any unused home office deduction is disallowed as a carry forward to future years.
  • If the taxpayer elects the new simplified option, the taxpayer is not eligible to use any carry-forward home office deductions from prior years in the year the election is made. Taxpayers may use these carry-forward deductions in a subsequent year if the older established methodology is again used.
  • Employees who receive an employer reimbursement or an expense allowance for home office expenses are not eligible to use the new simplified calculation.

The new simplified calculation will save Taxpayers time and effort in computing their home office deductions. However, in many cases, the new simplified calculation will produce a lower home office deduction than under the old methodology.

For help with your home office deduction or if you would like to discuss the pros and cons of each calculation method, please contact any member of our Tax Services Team.

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