If you have a home office, the IRS now offers a choice of methods in preparing your 2013 tax return. You can deduct your home office expenses the traditional way or use the new simplified method. The IRS created the simplified option to give taxpayers an easier way to figure out their home office expenses and reduce the complexity of compliance.
How the New Simplified Option Works
The new simplified option allows you to deduct $5 per square foot of your home office up to a maximum of $1,500 or 300 square feet. Using the simplified method also makes completing your return easier because you no longer need to complete Form 8829, Expenses for Business Use of Your Home. This form is used with the traditional method to allocate expenses such as mortgage interest, rent, utilities or property taxes for business use. Instead, you are allowed to deduct some of these expenses such as mortgage interest and property taxes in full on Schedule A if you itemize.
Simplified Does Not Mean Simple
Unfortunately, deciding whether to use the traditional or simplified method is not always an easy task. For example, those who have a larger home office or pay substantial property taxes are more likely to receive a bigger deduction under the traditional method. The only way to be sure you are getting the largest deduction is for your tax preparer to calculate your home office expense under both methods and compare.
Impact on the Sale of Your Home
Another important factor to consider is the potential impact of claiming a home office deduction on the future sale of your home. Under the traditional method, you are allowed to depreciate the portion of your home used as an office. This increases your current year write-off, but it can lead to higher taxes when it comes time to sell.
The way it works is that for every dollar you claim as an expense through depreciation becomes a reduction in the basis in your home. When it comes time to sell your home, the gain on the sale is calculated as the selling price minus your basis. So if you claim depreciation expense as part of your home office deduction for a long period, there is the potential that you might have a large gain and owe taxes when you sell your home.
Keep in mind that what was just described is a simplified scenario. Whether or not claiming depreciation will result in more taxes down the line depends on a number of factors and is something best discussed with your tax professional.
Record Keeping and Substantiation
Many people believe the record keeping necessary to support claiming the traditional home office deduction is overly complex and cumbersome. In reality, you most likely have all the necessary documentation already, such as support behind mortgage interest, property taxes and utilities. Basically, it is fairly easy to prove your home office expenses under the traditional method. The most critical factor is being able to prove that the area claimed as a home office is used exclusively for that purpose.
Perhaps the best part of the new rule is that it is optional. Regardless of which method you choose for filing your 2013 taxes, it does not stop you from switching which method you take next year.