If you use a home office for your business, it can save you a lot of money at tax time.
It also can be a filing hassle, a record-keeping bother and a constant concern that your tax return will be audited because of your residential workspace tax claim.
Now, however, some of those concerns have been eased, thanks to the simplified home office deduction.
This filing season, instead of filling out the 43-line Form 8829 to claim a deduction for your home office, you have the option to claim up to $1,500 by using a significantly streamlined work sheet.
The big question is should you use the new home office deduction method? The answer, as is usually the case in tax situations, is it depends.
Reduced record keeping
"There are a number of reasons why this simplified method is preferable," says Dave Du Val, an enrolled agent and vice president of customer advocacy at Citrus Heights, Calif.-based TaxAudit.com.
The big ones for paperwork-weary taxpayers are reduced record keeping and calculating.
Under the original home office deduction method, which the IRS is now calling the standard option, you keep track of direct and indirect home-related costs that affect your home office.
Direct costs include, for example, new lighting for your home office. Indirect costs are the percentage of your home's utilities, repairs, insurance and the like, that are attributable to your home office. Indirect costs also include a portion of your mortgage interest and property taxes, the balance of which is deductible on Schedule A.
With the standard option, these direct and indirect costs are entered on Form 8829 with your other expenses for business use of your home. The final calculation on that document then is transferred to your Schedule C and filed with your Form 1040 to report your business' profit or loss.
Less paperwork, but limited deduction
If, however, you choose to use the simplified home office deduction method, there's no need for Form 8829. Instead, you use the work sheet in the Schedule C instructions. This six-line page (with a few sublines for some entries) basically allows you to deduct the square footage of your home office at $5 per square foot up to a maximum $1,500.
If your work space is less than the maximum 300-square-foot area covered under the simplified method, your deduction will be less. CCH, the tax-publishing and software unit of Wolters Kluwer, offers an example. You use a den or spare bedroom at home as your home office and it measures 18 feet by 15 feet for a total of 270 square feet. Multiply that by $5 for a total simplified home office tax deduction of $1,350.
Since your home's mortgage interest and property taxes are not used proportionally for the simplified home office deduction, they are fully deductible as usual on your Schedule A. More appealing for many taxpayers: There is no longer the need to dig out your home records and do the math for the home office deduction.
You do, however, lose the value of home office depreciation under the simplified method. For some taxpayers, that could be a substantial amount.
Take a wider tax view
That's why taxpayers need to look not just at the dollar amounts both home office deductions might provide, but also their overall tax situation.
"You can't look at just the bottom line of the form," says Du Val. "Look at the whole return. This year, there are new things that could be affected by a home office deduction."
For example, Du Val says, your choice of the standard or simplified method will affect how much of your residential property taxes are claimed on Schedule A. Tax law now calls for a reduction in overall itemized deductions for higher-income taxpayers. By claiming the simplified home office deduction, all of your property taxes will be on Schedule A. By using the longer standard option, a lesser amount of property taxes will be itemized because some of that real estate tax payment counts toward your home office deduction.
If you're going to lose some of the property tax deduction on your Schedule A, it might be to your advantage to use the taxes as part of your standard home office deduction.
In addition, if you have a smaller home office deduction, your business income will be greater. That's good news, except as it relates to self-employment tax liability. More income means you'll owe more on Schedule SE, which is the self-employed worker's equivalent of the Social Security and Medicare taxes deducted via payroll taxes from wage earners' paychecks.
And larger real estate taxes on Schedule A could mean a bigger tax bill if you are subject to the alternative minimum tax. They are not allowed deductions under this parallel tax system that affects some higher-income filers.
So run the numbers to find out which home office deduction works better for not only your business, but your overall tax bill.
Some things stay the same
While the simplified method is easier to claim, some basic home office deduction rules remain in effect.
"Everyone who claims the deduction, regardless of the reporting method, still needs to meet all the qualifications for claiming this deduction," says Du Val.
These include that the home office area be used regularly for work tasks, as well as exclusively for your business needs.
The home office doesn't have to be a separate room, but it must be a clearly delineated area, such as a desk in the corner of your den, where only work -- the exclusivity requirement again -- is done.
Annual deduction choice
For many with home offices, the simplified method will be very welcome, especially by those who don't have very many other office expenses.
But all home workers might find some tax years that the simplified option is a better choice. That's fine. You can decide each tax year which method to use.
Remember, however, that if you use the simplified method for one year and the regular method for any subsequent year, you must calculate the depreciation deduction for the subsequent year using the appropriate depreciation table. And those depreciation amounts will come into play when you sell your home. Any home office depreciation must be taken into account when calculating the home's basis that you'll use to figure any possible taxable sale profit.
Du Val also recommends that taxpayers continue to keep good business and home office records throughout the tax year. You'll need them to help you determine which deduction method will save you more tax money.
The bottom line is that while the new home office deduction is easier for some filers, it's not as universally simple as its name might suggest.
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