When you’re traveling, a shortcut can be a time-saver, but taking it instead of the main route could cost you in other ways. The same is true in tax law, even when the shortcut is a safe-harbor simplification of an old rule.
An example is the new option for calculating the home office deduction on your 2013 federal income tax return. Under these safe-harbor rules, you multiply the square footage of your home office space (up to 300 square feet) by $5. The result is your deduction, up to a maximum of $1,500. Your actual deduction may be limited by your business income, and there’s no carryforward of unused amounts.
Depreciation is not allowed under the simplified rules, which means no reduction in your basis when you sell your home. In addition, if you itemize on your personal return, you can claim the full amount of your home mortgage interest and real estate taxes.
You can elect the safe-harbor for 2013 even if you used the regular method of calculating your deduction in prior years. You can also switch back in future years. Just be aware that once you make a choice for a particular year, you can’t change your decision.
While the safe-harbor calculation is simple, keep in mind your home office still has to meet the requirements for a deduction. That is, you must use the office regularly and exclusively as either your principal place of business or where you meet with customers or clients. Other rules apply if you’re an employee, or if you operate a day care or use your home for storing inventory.
The new rules offer a useful shortcut to a home office deduction. Contact us to learn whether you should choose this new route or stick with the regular way.