New Rules for the Home-Office Tax Deduction
The home-office deduction is one of the most popular deductions in the tax code. Unfortunately, it is also one of the most complicated and is often seen as an “audit magnet” because of the difficulty in properly complying with its rules. The IRS has taken notice of these issues, and as the Wall Street Journal recently reported, a simplified home-office deduction is on the way.
Until now, all taxpayers taking the home-office deduction write-off had to fill out form 8829, which has 43 lines and requires complex tracking of multiple expenses, including those for repairs and utilities. The new option is good news for taxpayers that hate record keeping. Taxpayers are allowed to deduct $5 a square foot for up to 300 square feet of office space, for a maximum deduction of $1,500. Mortgage interest and property taxes don’t have to be allocated to different forms and are fully deductible on Schedule A. Other home-office costs such as insurance aren’t deductible, but neither do they have to be tracked. There also isn’t any depreciation to be recaptured when the property is sold.
There are a few drawbacks. As previously mentioned, the simplified deduction has a cap of $1,500, while the average home-office write off over the past few years has been $2,600. The simplified write-off also imposes a one-size-fits-all value of $5 a square foot for home offices, which will likely make the option a nonstarter for taxpayers in pricier urban and suburban areas. Finally, if the taxpayer uses the simplified deduction and the business shows a loss, the write-off can’t be carried forward to future years. And if the business turns a profit, then a deduction carried forward from earlier years can’t be used.
The IRS is still taking comments on the simplified deduction, and a spokesman says the agency could make changes to future versions. For now, taxpayers with home offices can choose between the methods and are even allowed to switch back and forth from year to year. If you are facing questions regarding the home-office tax deduction and how it might affect you, please contact the tax attorneys at The McCleskey Law Firm for answers.