Tax Deductions When You Work From Home

There are a few ways telecommuters can save on taxes 

12/12/2016

Tax Deductions When You Work From Home

Working from home can be a great way to cultivate a healthy work-life balance and save money — whether you are self-employed or simply work out of a home office. Not only do you save on commuting costs, but you may also be eligible for tax deductions.
 
“Not so long ago, claiming a home office deduction was akin to pleading with the IRS to audit your tax return,” according to Steve Nicastro, financial writer for NerdWallet.com. “Today, with more than one-third of the country working from home, the deduction is much less likely to trigger an audit and much easier to take.”
 
These changes began with returns filed in 2014 for the 2013 tax year, when the IRS implemented the “simplified option” for deducting expenses related to using part of the home for business use. The simplified option didn’t change the criteria that must be met to qualify for a home office deduction, but it did streamline the calculations and requirements for record keeping.
 
“The standard method has some calculation, allocation, and substantiation requirements that can be complex and burdensome for small business owners,” states the IRS. “The simplified method is intended to reduce that burden.”
 
The simplified option allows a standard deduction of $5 per square foot of the home that is used for business, up to a maximum of 300 square feet. Regardless of what method you choose, you can claim a deduction only for the part of the home used exclusively for business and on a regular basis.
 
The IRS highlights that taxpayers who use the simplified method can claim home-related itemized deductions, such as real estate taxes and mortgage interest, in full on Schedule A, whereas with the standard method (also known as the regular method), such deductions are split between Schedule A and business Schedule C or F. Another difference is that if you choose the simplified method, no home depreciation deduction can be taken, and if you sell your home down the road, there is no allowable way to later recapture the depreciation for years when the simplified method was used.
 
One similarity between the two methods is that neither allows a deduction in excess of the difference between the gross income related to the business use of the home and the business expenses. Only the standard method allows the amount in excess of gross income to be carried over. Furthermore, if you elect to use the simplified method, you can’t claim loss carryover from a prior year when you used the standard method. On the other hand, loss from a prior year when you used the standard method can be carried over to the subsequent year if the standard method is used again, provided that the gross income test is met.
You are allowed to choose whichever method you want each tax year, so trying them both may give you the best idea of which is more beneficial for your lifestyle and finances.
 
There is one caveat to keep in mind if you switch between the two, however. According to the IRS: “If you use the simplified method for one year and use the regular method for any subsequent year, you must calculate the depreciation deduction for the subsequent year using the appropriate optional depreciation table. This is true regardless of whether you used an optional depreciation table for the first year the property was used in business.”
 
You can find FAQs about the simplified method at https://irs.gov/businesses/small-businesses-self-employed/faqs-simplified-method-for-home-office-deduction; however, the best way to ensure you are choosing the better option is to talk to your tax professional about your potential deductions with both methods.

Published by North Shore Bank. Includes copyrighted material of IMakeNews, Inc. and its suppliers. 

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