January 2013

The home office deduction is one which many taxpayers consider utilizing.  In today’s world, what professional is not also working from home, at least on occasion?  However, slaving away on your laptop from bed does not qualify as a home office, no matter how many hours are spent toiling instead of sleeping.  The IRS rules on the subject are complex and the basis for qualifying has not changed.

To qualify for a home office deduction, you have to meet each of the following four requirements:

  1. Business or trade activity.  Home office deductions are available for these categories only and not for other generally profitable activities, such as managing personal investments.
  2. Regular and exclusive use. You must regularly use a room or other separately identifiable area of your home for your business. The bigger obstacle is that the use must be exclusive.  This is why your bed or your kitchen table or any other number of home based spaces where work is performed cannot double as your home office.  Exceptions to the exclusive use test involve space used for the storage of work-related inventory or product samples, or as a day-care facility
  3. Principal place of business. One of the following must apply to meet this criteria:
      • Your home is your principal place of business.  It does not have to be the only place you conduct business, but it must be the principal place and therefore have the most time spent or most important activities performed there.
      • Your home is substantially and regularly used to conduct business, such as to meet with clients, customers or patients
      • The structure used for business purposes is free standing, such as a separate studio, garage or barn.
  4. Convenience of employer. This criteria only applies if you are an employee. Generally, this means that your home office benefits your employer and is not simply because you prefer to do certain tasks while at home.  You also cannot be accepting rent from your employer.

If you do qualify, there is good news when it comes time to calculating the amount of the deduction for your 2013 return.  On January 15, the IRS issued Rev. Proc 2013-13, giving taxpayers a safe-harbor calculation as an option for the home office deduction.  Instead of a specific identification of the costs paid for the home office (which may include mortgage interest, insurance, utilities, repairs, and depreciation), taxpayers who elect this method can deduct $5 per square foot for the office, up to a maximum of 300 square feet or $1,500 annually.  Form 8829 (Expenses for the Business Use of Your Home) is not required if this optional method is elected. The option is only available for 2013; if you are restating or preparing an initial filing for an earlier year, the old rules apply.

Like the specific identification method, the $5 per square foot deduction method cannot exceed the amount of gross income minus business deductions, meaning one cannot use the home office deduction to create a loss which offsets other income.  However, unlike the specific identification method, a taxpayer cannot carry over any undeducted loss to another tax year.

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