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IRS Simplifies Home Office Deduction Process

July 11, 2013

Home offices are steadily growing in numbers. According to sources, more than three million taxpayers can claim the home office deduction. Recently, the IRS made the calculation of the deduction easier. Now, taxpayers can multiply the area of their home office at a rate of $5 per square foot to get the tax deduction amount.

The IRS has also made it simpler for taxpayers to report and record their allowable deductions for their home office. The changes are effective from the beginning of tax year 2013, for which the returns will be filed in 2014.

Requirements for Making a Claim
Only a home office that is the principal place of business for a taxpayer can be used to claim the deduction. The property must be used exclusively and regularly for business activities. It must be used in any connection with the taxpayer’s trade or business where the business portion of the home is a separate structure and not attached to the home.

If taxpayers are using their home office for certain storage use, rental use or as a day care facility, they are required to use the property regularly, but not exclusively. The IRS also uses certain other factors to determine eligibility.

Changes in the Home Office Deduction Process
The changes do not alter the criteria of who can claim a deduction for a home office. It only simplifies the process. Taxpayers qualifying for this deduction can now get the benefits of the simplified process, including:

  • No home depreciation deduction or recapture of depreciation upon sale of the home only for the years in which the simplified option is used. If the regular method is used, this criterion does not apply.
  • Standard deduction of $5 per square foot of the home used for business. The maximum is 300 square feet.
  • Home-related itemized deductions, such real estate taxes and mortgage taxes, that are allowable can be claimed in full on Schedule A.
  • Any amount in excess of gross income limitation may not be carried over.
  • Loss carryover from use of the regular method in the earlier year may not be claimed.

The regular method is also available to taxpayers for use. Taxpayers may choose either the regular method or the simplified method when filing taxes for 2014. After choosing one method for a year, taxpayers cannot change it for that year later. They may choose another method for filing taxes the next year.

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