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Home Office Deductions: Is the Tax Advantage Worth It?

Is the Tax Advantage Worth It?

  • 8 October 2013
  • Author: ellice909
  • Number of views: 3549
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Home Office Deductions: Is the Tax Advantage Worth It?

The IRS is now using a simplified, common-sense approach to calculating home office deductions called the ‘safe harbor method.’ While the new optional deduction will reduce time and paperwork, it may not be right for everyone. Here, we take a look at the new option as well as an often-overlooked alternative that could save you even more money.

The new option caps home office deductions at $1,500 per year, based on $5 per square foot for up to 300 square feet. Individuals claiming this deduction are no longer required to complete a complicated 43-line form (Form 8829), notorious for its confusing expense allocation, depreciation and carryover calculations. allowable mortgage interest, real estate taxes and casualty losses on the home can still be claimed on Schedule A, with one new benefit: These deductions no longer need to be allocated between personal and business use. The portion of the home used in business, however, cannot be depreciated.

What the IRS considers ‘qualified business use’ of your home does not change under this new safe harbor method. The claimed portion of your home must be used regularly and exclusively for business and it must serve as your principal place of business. This means that if your home office did not qualify before, it still won’t qualify. This is an important point, since this type of claim is known to be a common audit trigger.

What’s not as well-known is WHY home office deductions often trigger audits. Home office deductions raise an individual’s Discriminant Function System (DIF) score. Every year, the IRS screens the highest-scoring returns and selects some for audit (the IRS outlines this process here). This certainly shouldn’t dissuade you from claiming a home office deduction if you do, in fact, qualify. However, what you’re risking for up to $1,500 in tax savings, you could be making at a much greater profit instead.

The alternative to a deduction? Have your business rent your home office.

 If your business is A) run primarily out of your home, and B) not a sole proprietorship, you may be able to turn the loss expense into an income-producing item by renting the home office space you already use. This way, instead of showing a loss deduction that raises your DIF score, you will show the home office as income generating (with rent that is substantially greater than the deduction).

The bottom line is to consider all your budget-saving options when it comes to business use of your home: some old, some new, and some you may have never considered before.

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