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Simplified Home Office Deduction

Jul 6, 2014 | Larry | business expenses, deductions, depreciation, IRS, office in the home, simplified home office deduction | No Comments

The simplified home office option took effect starting January 1, 2013. Use of this option allows the taxpayer who uses a home office for business to deduct the space without maintaining expense records. It is recommended by the IRS as a viable alternative to the traditional method, which requires input of actual expenses.

A description and rationale can be found at the following IRS websites. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Simplified-Option-for-Home-Office-Deduction. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Home-Office-Deduction.

The simplified option allows a home office deduction of $5/square foot, up to a maximum of 300 square feet, or $1500 or the net operating profit, whichever is less.

With use of the traditional method, the dollar amount of the deduction is unaffected by the $1500 ceiling.

See my previous posts on the home office and depreciation. http://shotlandtaxconsulting.com/172/ http://shotlandtaxconsulting.com/depreciation/.

The IRS’ rationale is as follows “The standard method has some calculation, allocation, and substantiation requirements that are complex and burdensome for small business owners. This new simplified option can significantly reduce recordkeeping burden by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses”. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Home-Office-Deduction

The simplified option is a bad deal. It will cost you money in overpayment of taxes. Let me explain why. In many cases, use of actual expenses will exceed $5/square foot, oftentimes in excess of the $1500 maximum. The IRS’ gambit is that the taxpayer will be dissuaded from using the standard home office method because of the record keeping they describe as onerous. The required records for the home office are pretty straightforward. They include items such as utility bills, mortgage interest, property taxes, etc. There is some upfront work, such as measuring the space (necessary with the simplified method) and obtaining closing costs and the initial tax assessment for depreciation cost basis. Hardly difficult. Additionally, refinancing and extensive maintenance/repair costs are not included in the simplified procedure, but are in the traditional calculations. With respect to difficulty of calculations, professional tax software does the math. Allocated depreciation and expenses are calculated automatically. Disallowed depreciation and expenses that exceed income are carried forward year after year. So all the taxpayer must do is complete the initial setup and the rest is automatic.

Finally, if the taxpayer maintains the required records and the simplified procedure gives a larger deduction, the taxpayer has the option to take it.

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