Simplified Home Office Deduction
Nov 12, 2014

Simplified Home Office Deduction

By Guest Blogger Cheri H. Freeh, CPA, CGMA

freeh-cheriMoneyLife100In 2013, the IRS issued Revenue Procedure 2013-13 which provided an optional safe harbor method to determine the amount of deductible expenses a taxpayer may claim for the use of a home office. The safe harbor was intended to provide taxpayers with a less-cumbersome method for calculating the deduction. The option became effective for taxable years beginning on or after Jan. 1, 2013. So, how useful is this new method?

The simplified home office option allows a deduction of $5 per square foot of home used for business, up to a maximum of 300 square feet. There is no reduction in the allowable home-related itemized deductions claimed on Schedule A (generally home mortgage interest and real estate taxes). There is no separate deduction claimed for depreciation, and no later recapture of depreciation for the years the simplified home office option is used. Taxpayers may choose either the simplified method or actual expenses for any taxable year, and may alternate between the two methods. The simplified method is intended to reduce the administrative, record keeping, and compliance burdens on taxpayers who qualify for the home office deduction and to reduce the amount of time spent by IRS personnel on compliance regarding this deduction.

Based on statistics from 2010 and 2011 tax return filings, about 4 million taxpayers claim the home office deduction each year. While we commend the IRS’s efforts to reduce the burdensome recordkeeping requirements on taxpayers, we need to look at how useful this deduction may be. In evaluating its effectiveness, the following situations must be considered:

  • Most taxpayers desire to maximize their allowable deductions. Because of this, taxpayers may still choose to calculate the actual home office deduction as well as the simplified home office deduction. To determine which method will provide greater tax savings. In this case, the estimated time savings in calculating the home office deduction using the simplified method will not be experienced.
  • If a taxpayer uses more than 300 square feet of their home for business, the actual expense method (as calculated on Form 8829) will generally provide a larger deduction.
  • The actual costs of a home office vary greatly within the United States. As a result, the $5 per square foot value may not fairly represent the cost of the home office.
  • Taxpayers who experience a loss on their business may carryover their home office deduction (for federal purposes only) if they use actual expenses. This allows them to gain a tax benefit in subsequent years when they have income. This benefit is not available for users of the simplified method since there is no carryover allowed.
The most important consideration for Pennsylvania residents is that Pennsylvania does not follow the federal guidelines for home office deductions. Because of this, Pennsylvania residents wishing to claim a home office deduction on their Pennsylvania tax returns must use the actual expense method.

The end result of all this analysis is that taxpayers in Pennsylvania who wish to claim a deduction for the business use of a home office will not experience the burden reduction intended by the IRS because both methods will need to be evaluated.

For more information on the deduction, visit the IRS website or the Pennsylvania Department of Revenue website.

More Resources:

Cheri H. Freeh is a principal with Hutchinson, Gillahan and Freeh PC in Quakertown. She served as PICPA’s president for the 2011-2012 fiscal year and serves on the Act 32 Tax Collection Task Force, the Fiscal Responsibility Task Force, the State Tax Business Privilege Tax Force, and the Insurance, State Steering, and CPA Image Enhancement committees. She has also served on AICPA Council from 2010-2014 and is a member of the Internal Revenue Service Advisory Council.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.