Who would have thought that the IRS would make taxes easier? It happened with an additional and simpler option for calculating home office deductions. The new option goes into effect in the 2013 tax year and is in reference to Form 8829. Previously, home office deductions specified on Form 8829 involved a complicated and, at times, vague calculation. The new deduction is based on $5/sq ft. of office space used. The maximum deduction is $1500 per person, corresponding to a home office of 300 square feet.
Rather than replacing the previous, complicated home office deduction calculation scheme, this change will supplement it. Taxpayers retain the option to use the older formula. It is predicted that many taxpayers are likely to accept the new simpler home office deduction calculation. The IRS estimates that the resulting time saved in preparing taxes will be roughly 1.6 million hours. Married couples may use the home office deduction separately. In other words, each spouse may deduct up to 300 square feet at $5/sq ft. for home office space. Essentially, married couples may claim up to a $3000 deduction for their home office(s).
Proceed With Caution
There is a catch to using the new deduction calculation. Insurance, depreciation, repairs and other expenses related to home office upkeep are not deductible with this new option. Mortgage interest, casualty losses and property taxes still remain legitimate itemized deductions. Additionally, change in formula for calculating a home office deduction does not alter what needs to happen to qualify for a “home office.” Regular and exclusive business use remains a requirement, as does a deduction cap set by the business yearly gross income. Lastly, no matter its formula, the home office deduction does not guarantee an audit but the odds increase. There are instances of legitimate and honest business operators who qualify for the deduction but elect not to take it. It may happen that the effective cost and stress of an audit, even if passed without problems, outweighs deduction benefits.