Knight: New and improved? New option for home office deductions
Special to the Daily
For the first time in decades, the IRS made a change to the home office deduction, or more technically, IRC Section 280A which permits taxpayers to deduct expenses allocable to the business-use portion of a residence. For sanity’s sake, I’m going to stick to calling it the home office!
The qualifications for the deduction haven’t changed. If you are an employee, you can only take a deduction if your home office is used for the convenience of your employer, meaning they require it, and they don’t provide you an office elsewhere. For businesses owners, the rules are far less stringent. The guidance is simple. In order to deduct your home office, it must be used in a trade or business activity and it must be used regularly and exclusively for business.
What has changed is how you calculate the deductions. Prior to 2013, you needed to track all the expenses related to the home office, including interest, taxes, repairs, maintenance and utility costs, as well as depreciation expense. Under the new code, called the safe harbor method, you no longer have to do the full calculations. If you prefer, you can simply deduct $5 per square foot of your home used for your home office, up to 300 square feet. No part of this calculation is considered depreciation expense, so when you sell your house, you don’t have to pay taxes on the depreciation taken along the way.
Is this change a win for taxpayers? That depends. If you hate tracking numbers, then it’s a huge gain. All you have to do is measure your space, report that figure on your tax return and you have your deduction. If you don’t mind tracking the figures along the way, I’ve found that most homes cost more than $5 per square foot to maintain, especially in areas of the country with higher than average real estate prices.
One other difference between the two methods could have an impact on your decision. The deduction you take for your home office is limited to the activity’s gross income for that tax year. If your business is running at a loss, you cannot take the home office deduction, but under the old calculation method you can carry that loss forward to a future year when your business does have a profit. Under the new safe harbor method, it’s a use it or lose it deduction. If you don’t have profits in your business, you cannot take the deduction, nor can you carry it forward to future years. The bright side is that you can switch methods from year to year, so it’s important to look at this decision annually, and not just assume one or the other works best.
I’ve been in practice for over a decade, and although hundreds of tax laws have changed during that period, I do believe this is one of the more progressive changes I’ve seen. It’s nice to know that the IRS is working hard to simplify the burden on taxpayers and this is a step in the right direction.
Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. For more info and to contact her, visit www.cpamichele.com.
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