Monday, June 24, 2013

Changes to the Home-Office Tax Exemption

Until now, the Home-Office Tax Deduction has involved a great deal of computation, as well as collecting of receipts for home expenses. The IRS has introduced a simplified option, which is available with the 2013 tax year. 

The original deduction, which has been in use for some time and remains available to taxpayers, is to identify how much square footage your office occupies and calculate the cost of rent/mortgage, electricity, taxes, insurance, etc. for that share of the overall home. If you have a 2,000-square-foot home and your office is 200 square feet, it represents 10% of the home so you could take 10% of all expenses associated with running the home and deduct that from your taxes. It’s a cumbersome method but can result in significant deductions for many taxpayers. 

The new option simplifies the process significantly. Taxpayers with home offices would be eligible to deduct up to $5 per square foot of office space up to a maximum of 300 square feet. No need to collect all of the household bills and run the calculations. While this can simplify the process for many, the maximum deduction allowed under this method may not provide as large of a deduction as the “old” method depending upon the circumstances. 

Either calculation method is available so it is a good idea to speak with your tax professional to identify the best method for you to use. Remember though, the office must be used exclusively for business purposes. No storing of any personal items in the office and no use of the office for any purpose other than business. Personal use including storage of personal items could result in the deduction being disallowed.

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