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Anne Powelson Anne Powelson
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Simplified home office deduction

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For 2013, small businesses have a new option when deducting home office expenses. They can use the old method, or the new simplified method, which promises less record keeping.  

The requirements which must be met before claiming a home office deduction haven't changed. The office space must still be used regularly and exclusively for business (with the usual exceptions to exclusive use for daycare and inventory space.)

There are a whole series of differences between the two methods, some of which are summarized below. (The two options are listed as 'Simplified' and 'Form 8829.')

Deductibility of mortgage interest and real estate taxes  

Simplified:  All on Schedule A. 

Form 8829: prorated between the business and schedule A. 

Insurance, maintenance, utilities, casualty losses  

Simplified:  $5 per square foot is allowed.  

Form 8829:  actual expenses are prorated between business and personal use; only business use is deductible.


Simplified:  Not calculated. No add back when the house is sold.  

Form 8829:  Depreciation is allowed on business use part of the house. When the house is sold, depreciation allowed or allowable is recaptured (added to your income in the year the house is sold.)

Home Office Size  

Simplified:  Actual space used exclusively and regularly for business not to exceed 300 square feet.  

Form 8829:  Actual space used exclusively and regularly for business. No limit on size.

Limit on deducting home office expenses  

Simplified:  home office expenses may not exceed net business income (i.e. may not put the business into a loss position.) Any home office deductions not used are lost. Carry-over home office expenses from prior years may not be used.  

Form 8829:  same restriction for the current year. Home office deductions not used may be carried over to future years. And prior year carryovers may be used, subject to the same restrictions, against current year business income.  

You can choose either method for a given year. However, once the election is made, it is irrevocable for that tax year. The next year you may use the same method or swap. If you have multiple businesses, all businesses must use the same method. Caution: if you switch from the simplified method to Form 8829, a special depreciation calculation is required.  

You can see how the simplified method is easier to calculate. But the best method to use will depend on your tax situation.   

Heads up: the IRS is projecting a delayed start to tax season, blamed on the 16-day federal government closure. This delay affects when the IRS starts accepting electronically filed returns and when they start processing mailed returns. At this time, the exact date the IRS will begin processing returns is unknown, but will probably be late January or early February. As a reminder, tax preparation offices will still be open. Once you have all your tax information, you are welcome to come in and get your return prepared, knowing it will be sent to the IRS the moment they begin accepting returns.


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