What Is The New Home Office Deduction?

The new deduction for people that work from home could save taxpayers money and time when it is time to file tax returns. There are millions of people that work from home every day in the United States. The Internal Revenue Service has created a new option for these people so that they are able to deduct some of the expenses on their federal income tax returns.

The home office deduction is currently in effect for the 2013 tax year. Workers based out of their home will be able to claim a tax deduction of $5 sq. ft for 300 sq. ft of workspace or less. The total deduction will be up to $1,500 depending on the amount of office space they are using. The space must meet requirements set by the IRS. The space must be used exclusively and regularly for the purpose of business.

 Save Time On Record-keeping And Paperwork

The internal revenue service is estimating that this new option for home office expenses will save more than 1.6 million hours for small businesses in paperwork and record-keeping. However, taxpayers will still have the old option to use Form 8829 in order to calculate the deduction if they choose to.

 Is The New Home Office Deduction The Best Option?

The new home office tax deduction is not going to be the best option for all small businesses. It will be the best option for taxpayers who have less than $1,500 each year in home office expenses and if the home office is smaller than 300 sq. ft. The best thing to do is to calculate whether your expenses will be more than $1,500 or if you will have a lot of depreciation. If your expenses are much higher than $1,500, then using Form 8829 will be the best option for you. Your tax advisor can also assist you with determining the option that is best based on your individual situation.

This option may be easier for more workers that are based out of their home to be able to get a deduction. In the past, the home office deduction was a red flag for IRS audits. Many people were afraid to take the deduction because they were afraid that they would not have the proper records to back up the deduction. The new home office deduction is a safe harbor method taxpayers can choose to use.

If you work from home, now you can take the new home office deduction when you file your federal tax return this year. The first thing you need to do is determine if your meet all of the IRS requirements for a home office. Next, determine if the new deduction will be the best option for you. Consider speaking with a tax advisor to help you decide what makes the most financial sense for you. Remember, you do not have to use the new home office diction option. You can still use Form 8829 if it will provide a higher deduction for you.

Home Office Deduction | Video

In this short video, Sanjiv Gupta CPA discusses the “Home Office Deduction”.

What is considered as Home Office ?

Please consider the IRS definition for Home Office.

Whether you are self-employed or an employee, if you use a portion of your home for business, you may be able to take a home office deduction.  Here are six things the IRS wants you to know about the Home Office deduction

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

  • as your principal place of business, or
  • as a place to meet or deal with patients, clients or customers in the normal course of your business, or
  • in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

2. For certain storage use, rental use, or daycare-facility use, you are required to use the property regularly but not exclusively.

3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on line 30 of Form 1040 Schedule C, Profit or Loss From Business.

6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.


Deducting Rent Payments

Keywords that should come to your mind is “reasonable in amount”.   If you are renting from your family or friends than you should ensure that rent is a reasonable amount.  This is very important but not as important if you don’t know the landlord at all.  What is a reasonable amount you may ask?  Reasonable amount is any amount that will be paid by an unrelated party.

Rent paid for property used for business are deductible.  This also includes any additional expense you may have on behalf of your landlord.  For example, you may deduct property taxes as part of your rent payments providing your lease terms require you to do so.

What if the property you are renting is owned by a corporation in which you are major share holder?

This is where rent expense can get tricky.  Once again number one rule is that Rent Amount should be reasonable, but you can not teat the rents as passive income that you could use to offset your losses from other passive activities. This kind of transaction is strictly prohibited by the law.

Rent with Option to Buy?

This kind of arrangements are great but sometimes it may not be clear if payments made are “Rent Payments” or “Down payment”  for the purchase of the car.  Make sure agreement clearly states what payments will be treated as rent and what will be considered as purchase or down payment.

Payments are not- deductible as rent if they are made under “conditional sales contract” which states that you will acquire the car after making the certain number of payments.

For example  You lease a car for a period of three years.  Your lease agreement provides that at the end of three years you have an option to buy the car and all payments made to date will be applied towards the purchase price.  In this kind of situation, your payments will mostly likely be considered as purchase rather than lease payments.

Can you deduct advance rent payments?

No – you can not.  You can only deduct the portion of the rent that applies to use of the rented property during the year.

Cost of cancelling the lease?

This is a deductible expense.

Improvement made to leased property?

Improvements you make to leased property ? This can be tricky calculation.  Please make sure to consult a professional.  You can deduct the improvements. However, improvements are depreciated over their recovery period defined by the law.  Please note that you can not depreciated over your term of the lease.

Renting a portion of your home for business?

You can deduct the rent expense as “home office deduction”.