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Posted: January 29, 2013

Home office tax deduction made easy

New year, new form

Wayne Farlow

Many employees work often, if not exclusively from a home office.  As long as a home office is required by your employer and the area is used exclusively for business purposes, it is likely eligible to be claimed for a home office income tax deduction.  

Until now, the complicated IRS form 8829 was required to receive this tax deduction.Taxpayers also have had the concern that a home office deduction is a red flag for an IRS audit.  Finally, form 8829 includes a depreciation deduction for the portion of the house that is used as a home office.  Upon the sale of your house, any claimed depreciation must be recaptured and income taxes must be paid on the recaptured depreciation.  This combination of potential negatives has dissuaded many people, who rightly qualify for a home office deduction, from claiming this deduction.

On Jan. 15, the IRS announced that it would provide a new option for taxpayers who have a qualifying home office.  The new option begins in the first quarter of 2013 and should provide a much easier, less cumbersome method for claiming a home office deduction.

The new, IRS approved option will allow taxpayers, with a qualified home office, to annually deduct five dollars per square foot of home office space.  The maximum size of the home office allowed with this option is three hundred square feet, providing for up to a $1,500 home office tax deduction.

While the tax payer will still have to complete an IRS form to take advantage of this new option, the new form should be much simpler than the forty three line form 8829.  If the new form works as promised, the IRS will be demonstrating that it is beginning to understand the changing requirements of the 21st  century workforce.

In 2012, approximately fifty two percent of all small businesses were home based, with most of these businesses having a home office space that would qualify for the home office tax deduction. Larger businesses are also recruiting employees working in a virtual environment, where they are required to work from home.

To maximize a home office deduction with the current form 8829, the percentage of a home that is used as exclusively for a home office must be depreciated.  Even though my home office fully qualifies for the home office deduction, I have never claimed this tax deduction because I did not want to have the tax complications of depreciation recapture, when my home was eventually sold.  If this new option works as is being implied by the IRS, it appears that no depreciation must be claimed.  If so, no depreciation recapture will be required upon the sale of the house.  If no depreciation (and eventual recapture) is required, starting in 2013, I (along with millions of other taxpayers) will use the new, optional home office tax deduction form.

While the details of the IRS announcement remain unclear, if you currently have (or could have) a qualifying home office, but have never claimed a tax deduction for this office, 2013 may be the year to begin claiming this deduction.  Be sure that your home office area is used exclusively for business and that your employer requires that you work (at least part of the time) from home.  If both of these conditions are met, you likely will qualify for the home office tax deduction.

If the final IRS forms are as simple and straightforward as their announcement appears, 2013 could be the year in which millions more Americans will rightfully be able to claim a more simple home office tax deduction.

Wayne Farlow is the founder of Financial Abundance, LLC, a Registered Investment Advisor firm.  He is a Certified Financial Planner (CFP®), focusing on Retirement Planning, Investment Management, Small Business Owner Planning and Sudden Wealth/Inheritance Planning.  His book, “Financial Abundance Guide,” is available free at www.farlowfinancial.com .  He can be reached at wayne@farlowfinancial.com or at 303-554-0309.

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