Tuesday, August 20, 2013

Home Office Deduction- Changes for 2013

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If you use your home for business, there are expenses you can deduct on your tax return. The home office deduction is available to home owners & renters alike. The home must be used by a self-employed individual or an employee  who works from home for his employer's convenience. 

This deduction has been available for a long time now, however with the tax year beginning January 1st, 2013 (filing in 2014), the Internal Revenue Service issued Rev Proc. 2013-13. This revenue procedure details an optional safe harbor available to individual tax payers for calculating a home office deduction. 
The individual can claim the Home Office Deduction based on either the Simplified Method or the Regular Method (Details Follow). 

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Simplified Option: 

  • A standard deduction of $5 per sq foot for a home used for business up to a maximum of 300 sq feet. 
  • No home office depreciation deduction is allowed nor is a later recapture for the years the simplified option was used. 
  • Allowable home related expenses, such as, Mortgage Interest or Property Taxes is claimed in full on Schedule A. 
  • Expenses in excess of income cannot be carried forward. Nor can a loss carryover from a previous regular method used be claimed. 

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Regular Method: 
  • Actual Expenses determined for percentage of the home used for the business will be used. 
  • Home related expenses will be apportioned between Schedule A & the business Schedule C or F. 
  • Depreciation and depreciation recapture for portion of home used for business can be claimed.                            
  • Amount in excess of gross income limitation can be carried forward. 


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What Method do I Use?

  • Either of the above methods can be used for the tax year.
  • Once the method is chosen for a taxable year, it cannot be changed to the other method for the same tax year. 
  • If the simplified option is used one year & later changed to the regular method, the depreciation for the subsequent year should be calculated using appropriate optional depreciation table. 
  • The regular method requires detailed record keeping but the simplified option does not. 
  • The home office deduction under the simplified option is limited to $1500. 
  • Both the methods should be compared to yield the most beneficial deduction to the tax payer. 
Bibliography: 

  1. Revenue Procedure 2013-13
  2. Internal Revenue Service
  3. AICPA.org
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Please read my disclaimer here. For more questions regarding this and other matters, I can be contacted at manasa@mntaxsolutionsllc.com.