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For folks who work out of their homes, including home-based businesses and telecommuters among others, there is a new alternative available starting with the 2013 tax year for claiming the Home Office Deduction. This new method saves a lot of extra recordkeeping and simplifies the filing process considerably.
In the past (including tax year 2012 which you’ll file by April 15, 2013), to take the home office deduction you are required to fill out Form 8829, Expenses for Business Use of Your Home. This form requires you to compile all of your expenses for your home and then allocate those expenses to the portion of your home that is used “regularly and exclusively” for business purposes.
IMPORTANT NOTE: For your 2012 tax return (which you’re filing in 2013) you must use Form 8829 as usual. The new method will be available on your 2013 tax return which you’ll file in 2014.
The new option provides a flat rate of $5 per square foot of the portion of your home; there is a $1,500 limit, and limited by the income derived from the business (along with your other business expenses). All of your other expenses relating to the business are still deductible – such as supplies, wages, business cards, etc..
Using the new option eliminates the depreciation of your home, and your allowable mortgage interest, real estate taxes, and casualty losses can still be deducted as itemized deductions on your Schedule A.
It’s important to note that the requirement that the portion of the home dedicated to the business use must be used regularly and exclusively for the business purpose. For more information on the definition of “regular and exclusive use”, see IRS Publication 587, Business Use of Your Home.
Sterling Raskie, MSFS, CFP®, ChFC®
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