Effective for the tax year 2013 the Internal Revenue Service (IRS) released a simplified option for how to calculate an office in the home or business use or a home deduction.
Under this new method:
  1. A taxpayer can elect either the simplified method or the actual expense method (the current method) for their 2013 and later returns.
    1. Under the actual expense method, taxpayers calculate all their costs (depreciation on the home, mortgage interest, property taxes, utilities, insurance, HOA, repairs, etc.) and then apply a percentage based on the square foot space of the office vs. the total house.
    2. Using the simple method, they would instead multiply $5 per square foot times the office space up to a maximum of 300 square feet (or a $1,500 deduction each year).
  2. A taxpayer may elect either method for any year, but once a specific method is elected for a tax year, they may not go back and change it at a later date (for that year).
  3. Use of the simple method does not preclude a taxpayer from still deducting mortgage interest and property taxes on their Schedule A and there is no reduction in those amounts as there could be under the actual expense method.
  4. There is no effect to other business deductions by electing the simple method for business use of a home (for example, advertising, wages, supplies).
  5. One major advantage beyond the simplicity of use is that upon sale of the house, there is no recapture of depreciation associated with any year in which the simple method is used (if there is a gain upon sale).
  6. See IRS Revenue Procedure 2013-13 for additional information.
  7. Below is a table provided by the IRS comparing the methods.
  8. If you want to find out more about this method or business use of your home and how this might relate to your tax situation, please contact us to schedule your free one-half hour consultation.
Table provided by the IRS:
Simplified Option
Regular Method
Deduction for home office use of a portion of a residence allowed only if that portion isexclusively used on a regular basis for business purposes
Allowable square footage of home use for business (not to exceed 300 square feet)
Percentage of home used for business
Standard $5 per square foot used to determine home business deduction
Actual expenses determined and records maintained
Home-related itemized deductions claimed in full on Schedule A
Home-related itemized deductions apportioned between Schedule A and business schedule (Sch. C or Sch. F)
No depreciation deduction
Depreciation deduction for portion of home used for business
No recapture of depreciation upon sale of home
Recapture of depreciation on gain upon sale of home
Deduction cannot exceed gross income from business use of home less business expenses
Amount in excess of gross income limitation may not be carried over
Amount in excess of gross income limitation may be carried over
Loss carryover from use of regular method in prior year may not be claimed
Loss carryover from use of regular method in prior year may be claimed if gross income test is met in current year