Deducting for a home office can be streamlined this year (SFGate)

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Deducting for a home office can be streamlined this year (SFGate)

It's not often that something in the tax code gets easier, which makes the new simplified home office deduction noteworthy.

Starting with 2013 tax returns, people who work from home have the option of deducting up to $1,500 worth of housing-related expenses in one line on their tax return. Or they can use the old option, which involves filling a complex 43-line form (8829, Expenses for Business Use of Your Home).

In the Bay Area, where housing costs are so high, the old version will still produce a bigger tax write-off for most people who work full time out of their homes.

But the new option will be a godsend for someone who, for example, has a full-time job but makes a little money drawing graphic novels from a dedicated space at home, saysKaren Brosi, an enrolled agent in Palo Alto.

To take either deduction, you must have a room or portion of a room that you use exclusively, on a regular basis, for your business.

To use the simplified option, just multiply the square footage of your dedicated office space (up to 300 square feet) by $5 per square foot and deduct it on line 30 of Schedule C, Profit or Loss From a Business.

This deduction replaces the housing-related expenses you could deduct on Form 8829 if you were using the old, harder option.

No matter which option you choose, you can still deduct other business-related expenses such as travel, meals, supplies, equipment or business use of a vehicle on Schedule C.

The hard option involves dividing the square footage of your dedicated office space by the square footage of your home to get the percentage used for business. Let's say that comes out to 10 percent. Then, you add up 10 percent of property-related expenses - such as mortgage interest or rent, property tax, repairs, utilities, insurance and depreciation - on Form 8829 and transfer the total to Schedule C.

However, if you own a home and are itemizing deductions, you can only deduct 90 percent of your mortgage interest and property taxes as deductions on Schedule A, to avoid double-deducting these expenses. This only applies if you are using the hard option.

In the Bay Area, if your rent or mortgage interest is $2,000 a month or $24,000 a year, 10 percent is $2,400, which by itself is bigger than the maximum deduction ($1,500) under the simplified option.

Neither option can reduce the net income from your business below zero. "You generally cannot create a loss from the home office deduction," Brosi says.

Suppose the gross income from your business is $10,000 and you have $1,500 in home office expenses and $9,000 in other expenses. No matter which option you choose, you can only deduct $1,000 in home office expenses.

If you use the old option, you can carry the remaining $500 forward to offset business income next year. If you use the simplified option, you forfeit the $500.

If you are on the borderline, consider both options because the simplified version has a few benefits that might tilt the decision in its favor. Under the simple option:

-- If you own a home and itemize deductions, you can still deduct 100 percent of your mortgage interest and property tax on Schedule A.

-- You don't have to document your expenses, a boon to people who aren't cut out for paperwork.

-- You won't have to calculate your allowable depreciation, a mind-bending exercise, and you won't have depreciation come back to haunt you when you sell the house.

Under the hard option, you are entitled to a deduction for depreciation on your dedicated office space. Whether you take this deduction or not, it reduces the cost basis in your home and could increase the tax you pay when you sell your home, says Steve Boultbee, a senior manager with accounting firm Marcum.

This is known as recapture, and avoiding it is one reason to take the simplified option.

For taxable years in which the simplified method is used, "the depreciation deduction allowable for the portion of the home used in a qualified business use is deemed to be zero," the IRS says. "Accordingly, you do not have to recapture any depreciation for taxable years in which you used the simplified method."

Keith Hall, chief executive of the National Association for the Self Employed, hopes the simplified option will encourage more people to claim the deduction.

"Our statistics tell us that only about half of the people who are eligible for the home office deduction claim it," Hall says.

The other half, he suspects, don't take it "because they are afraid it generates an audit or is just too stinking complicated."

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