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The Dark Side of Simplified Home Office Deduction

by Alex Franch, Tax Specialist

2014_11_26 the Dark Side medium_13658502903In 2013, the IRS implemented an optional simplified method of calculating the Home Office Deduction. The intention was to reduce the paperwork and record keeping burden on small businesses. Limited and capped at $1,500 per year, it is based on a standard square footage amount of five dollars for up to 300 square feet.  Thus, the simple calculation is $5 x sqft, up to $1500.  Taxpayers using the new option will deduct no depreciation. Mortgage interest and real estate taxes will be Itemized deductions (Schedule A).

Sounds simple, right? However, there are some limitations for home office deductions:

  1. The amount of deduction is limited to the amount of business profit, excluding the home office deduction. This is no different from the actual cost method of calculation.
  2. BUT for any unused home office deduction there is no carryover to future years when your business produces a profit. The actual cost method, of course, could be carried forward to offset income in future years.

NOTE:  The simplified option does not change the criteria for claiming a home office deduction.
For example, the home office must be used regularly and exclusively for business purposes. The election to use either calculation option is irrevocable once chosen for a year but can be changed each year.

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photo credit: Glenn Brown via photopin cc

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