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IRS Simplifies the Home-Office Deduction, for 2013 (San Francisco Gate)
In an interview with the San Francisco Gate, NASE National Tax Advisor, Keith Hall, highlighted the many years of work that has gone into getting the IRS to issue a simplification to the Home Office Deduction.
"This is as good an option for a standard (home office) deduction as we possibly could have hoped for,” says Keith Hall, the association’s national tax adviser. He says the average home-office deduction for “micro-business owners,” is around $2,000. Some business owners who deduct more than $1,500 might opt for the new standard deduction just to simplify their lives. But they should not overlook the impact on their self-employment tax and itemized deductions."
Read the full article here.
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IRS simplifies the home-office deduction, for 2013
Posted By: Kathleen Pender | Jan 15 at 4:26 pm
The Internal Revenue Service has just announced a simplified way to take the home-office deduction. Instead of filling out a 43-line form (8829), people will have the option of deducting $5 per square foot for up to 300 square feet of office space, or $1,500.
Unfortunately, the new deduction can’t be taken on 2012 tax returns. It starts with 2013 tax returns, which most people will file in 2014.
Taxpayers will still have the option of taking the deduction on Form 8829, if that provides a bigger tax saving and they don’t mind the extra paperwork.
The National Association for the Self-Employed, which has been lobbying for a simplified home-office deduction for 10 years, hailed the new development. “This is as good an option for a standard (home office) deduction as we possibly could have hoped for,” says Keith Hall, the association’s national tax adviser.
He says the average home-office deduction for “micro-business owners,” is around $2,000. Some business owners who deduct more than $1,500 might opt for the new standard deduction just to simplify their lives. But they should not overlook the impact on their self-employment tax and itemized deductions.
To claim the new or existing home-office deduction, business owners must have a space they use exclusively and regularly for their business.
Existing deduction: To claim the existing deduction, they divide the square footage of that space by the square footage of their entire home to get the percentage used for business.
They can then deduct that percentage of property-related expenses — such as mortgage interest or rent, property tax, repairs, utilities, insurance and depreciation — as a business expense on Form 8829 and on Schedule C, Profit or Loss form a Business.
This deduction reduces not only their income tax but also their self-employment tax.
However, if they deduct 10 percent of their mortgage interest and property tax as a business expense, they can only deduct 90 percent as an itemized deduction on Schedule A.
New deduction: If they chose the new standard deduction, they don’t go through that calculation. They simply multiply the square footage of their home office by $5 per square foot, up to 300 square feet. A 15×20-square-foot office is 300 square feet.
That deduction — up to $1,500 — covers all property-related deductions. It is also deducted on Schedule C and reduces their business income and self-employment tax. If they choose this option, they cannot separately deduct their property-related expenses such as mortgage interest or rent as a business expense on Schedule C; the standard amount of $5 per foot takes all of that into account. But they can deduct other business-related expenses such as office supplies, toner cartridges, a dedicated fax line and such.
If they choose this option, own a home and itemize deductions, they can still deduct 100 percent of their mortgage interest and property taxes on Schedule A.
Some business owners whose home office deduction is right around $1,500 might go through both calculations to see which one makes sense. “You have to decide how the $5 per square foot or $1,500 limit compares with the actually allocated expenses plus depreciation,” as well as the effects on self-employment tax and Schedule A deductions, says Evan Appelman, an enrolled agent in Kensington.
Steve Boultbee, a senior manager with Marcum in San Francisco, says the new deduction might not help a lot of people in the Bay Area, where property costs are so high. But it will help those who are entitled to the deduction but haven’t been taking it because they didn’t keep good records.
It’s not clear whether the IRS will create a new form for the standard home-office deduction or add it to Form 8829. The IRS is seeking comment and it could change somewhat before taxpayers start filing their 2013 returns. For details, see the IRS revenue procedure here.