One of the most popular deductions taken by self-employed taxpayers is the home office deduction. In fact, according to the latest data from the IRS, nearly 3.4 million taxpayers claimed the deduction in 2010.
To take the deduction, the IRS requires the home office be your principal place of business and it must be used exclusively and on a regular basis as such. For 2013 there is a ‘new and improved’ method of calculating your home office deduction.
Rather than completing 43 lines of Form 8829, you may simply use the optional method of deducting $5.00 per square foot for home offices up to 300 square feet. It caps at $1,500. You cannot take depreciation expense on the real estate if you use this method. You can however, use this method one year and use the standard Form 8829 method the next year.
Home office expense is not an automatic deduction; all other rules and regulations pertaining to home office still apply. This simply provides an easier method of dealing with the home office expense. The amount deductible under this new optional method appears to be somewhat low.
Most taxpayers are entitled to more according to my experience, and so completing Form 8829 rather than taking the optional method might prove worthwhile. But you don’t know until you try it.
Personally, I don’t see anything so tough about completing those 43 lines on Form 8829. Using tax preparation software eliminates calculations for most of the line items. It’s a matter of inputting the various data: rent or mortgage interest, property taxes, utilities, insurance, cleaning and maintenance, repairs, landscaping, etc. An allocation is made based on business use percentage and off you go.
The IRS also states, “homeowners… can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.”
For example, your mortgage interest is $10,000 and your home office represents 10% of your home’s square footage: You would therefore deduct $1,000 on Form 8829 and $9,000 on Schedule A. The advantage of allocating this expense between the two forms is that any amounts written off on Form 8829 reduce self-employment tax.
Using the new optional method, you get the full write off for mortgage interest and property taxes on Schedule A and are still able to deduct the automatic write off of $5.00 sq. ft. on Schedule C.
Another advantage to using the optional method is that you won’t be audited for home office – at least not for determination of expenses. The IRS might look at whether or not you have a valid deduction and it might whip out the measuring tape to make sure you didn’t embellish the size of it. But it won’t comb through your utility bills and other expenses to determine the validity of those write-offs.
If you are allowed to take full deductions on Schedule A as well as use the new optional method for home office, you might be securing a fatter write off. Throwing in this little tidbit means that it’s time to crunch the numbers to determine an overall tax savings. I suggest you run the numbers both ways before deciding which method is more beneficial for your tax picture.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.