Any freelance writer who spends hours calculating business use of home expenses for their tax return might shout a fervent “hurrah!” when they hear about the new simplified home office tax deduction option for 2013. But writer beware – the easy option could cost you dollars.
Starting from the 2013 tax year, writers claiming a home office deduction have two options to work out their deduction:
1) The regular home office deduction method we’ve known and (ahem) loved for years using Form 8829 Expenses for Business Use of Your Home. This requires calculating actual expenses for the percentage of the home used for business. Obviously you need to keep good records to do the math on those expenses and support your deduction.
2) The new simplified home office tax deduction, also called the safe-harbor method, does away with recordkeeping, calculator frenzy, and form-filling. Just take the flat-rate deduction of $5 per square foot of the part of the home used for business. This method is capped at a maximum of 300 square feet ($1,500).
Note that the new simplified option does not change the requirements for qualifying for a home office deduction. For example, the space still needs to be used exclusively and regularly as your principal place of business.
Simpler sounds swell, but although the new option is much easier, I found that it worked out to be more expensive for me. When I ran the numbers both ways, the simplified method reduced my deduction by about $400 compared to the traditional method of actual costs on my modest 120 square foot office. I have relatively low overheads in New Mexico. Writers in pricier areas might find themselves even worse off with the $5 flat rate.
“I suggest you calculate the numbers both ways,” says Julian Block, ASJA member, tax attorney, and prolific author of tax articles and books including Easy Tax Guide for Writers, Photographers, and Other Freelancers. “Do the actual expense method and then do it with the simplified method and see if there’s any significant difference.” If the regular way provides a much larger deduction, writers should probably stick with that. “If there’s not much difference then you might use the simplified method,” says Block (no relation to H&R Block).
In our business, we all know that time is money. So for some self-employed writers the simplified option might be tempting to save time tracking expenses and tackling the 43-line Form 8829. (The National Association for the Self-Employed, one of the groups that has lobbied for a simplified Home Office deduction, reckons that nearly half of home-based businesses don’t complete the form due to the complex process.) For other writers, the IRS attempt to “reduce the paperwork and recordkeeping burden on small businesses” might not be such a good deal.
If you qualify for a business use of home deduction and don’t claim the maximum deduction you are allowed, Block says: “It’s not just that you are overpaying your income taxes, also you are overpaying your self-employment taxes on Schedule SE. For a lot of writers that’s an expensive penalty.”
Claiming the Home Office Deduction
“A lot of people have not been claiming the Home Office deduction,” says Block. “Not so much because of the complexity of filling out the form, but because of the mistaken notion that to claim the deduction increases the chances of being selected for an audit. That’s a misconception but it’s out there.”
But if a writer hasn’t claimed a deduction before on a (qualifying) home office because they don’t keep records or don’t relish the paperwork, will suddenly claiming it for the first time with the simplified method raise IRS flags?
“Each year stands on its own,” says Julian Block. “That you’re claiming it this year and hadn’t done so previously, of itself that’s of no significance to the IRS. Are you eligible? Did you select an appropriate number of square feet?”
Whichever method you choose for 2013, the IRS says you can change it next year if you want, although you can’t switch methods within the same tax year.
1) For the Simplified Home Office Deduction: Enter the business use of home deduction at line 30 of the 2013 Schedule C. Basically you report the total square footage of your home, the footage of the part used for business, then multiply the latter by $5. The instructions for Schedule C contain a worksheet for the Line 30 simplified option on pages 9-11.
2) For the Regular Home Office Deduction: Complete Form 8829 Expenses for Business Use of Your Home. If you report online with the IRS Free File system then learn by my experience. At first glance it appears that you can only use the simplified option as Form 8829 isn’t on the usual ‘add form’ list. But once you’re in Schedule C, you’ll see a small tab at line 30 that allows you to add the form from there instead, and fill it in just the same as you ever did.
If a tax professional prepares your returns, make sure they run the numbers both ways too. “The return preparer should be aware of the simplified method,” says Julian Block, “but don’t assume as an article of faith that this is in fact so.”
This IRS comparison chart highlights the main points of the new simplified method versus the regular method. The IRS FAQs on the Simplified Method for Home Office Deduction gives more details.
Personally, I don’t find it too “taxing” to do the math the old-fashioned way, especially when the actual expenses give me a higher home office deduction. Which way works best for you?