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Schedule C CPA accountant provides an example for the IRS 2013 Simplified Option for Home Office Deduction | IRS tax Form 8829 | Rev Proc 2013-13

Schedule C CPA accountant. Simplified option home office deduction.

Which method of calculating the IRS home office deduction on Form 8829 is best? It depends. We’ll calculate it both ways each year to help maximize the deduction. (910) 399-2705.

The new IRS simplified option for home office deduction is available for Schedule C filers staring in tax year 2013.

  • It allows deducting $5 per square foot for the home office deduction.
  • There’s a $1,500 cap per tax year. So 300 square feet is the most space you can claim.
  • You can choose which method to use for Form 8829 and Schedule C each tax year.
  • Once you file Form 1040 with Schedule C you can’t amend the tax return and switch methods.
  • With the simplified option home office deduction, you can’t claim any depreciation for your home for that year.
  • You can’t carry over any excess home office deduction to subsequent years.
  • If you use the simplified option home office deduction in 2013, you can’t use any home office deduction carry over from earlier years.

The IRS home office deduction tax form logistics include:

  • Calculating the tentative profit or loss on Line 28 of Schedule C. This is before any home office deduction calculation. Why? The tentative gross profit on Schedule C limits the home office deduction. If you have a $300 tentative profit on Schedule C and $1,200 of potential home office expense, you can only claim $300. With the standard method you can carry forward the excess $900 to future years. With the simplified option home office deduction you lose that $900 forever.
  • Calculating the potential home office deduction on IRS tax Form 8829.
  • Entering the home office deduction from Form 8829 on Line 30 of Schedule C.
  • Carrying the net profit or loss from Schedule C (including the home office deduction) Line 20 to Line 12 of Form 1040.
  • Rev Proc 2013-13 explains the simplified option home office deduction for tax preparation purposes.

“I’ll calculate the home office tax deduction both ways for Schedule C. Why? To decide which method is best for this year’s deduction and perhaps next year’s as well.”
– Gary Bode, Schedule C CPA accountant

Standard vs. Simplified Option Home Office Deduction Example

Here’s the scenario:

  • Schedule C Client shows a tentative profit of $4,000 on Line 28 for 2013. Remember this doesn’t include any home office deduction yet. So, with both home office deduction methods the deduction caps at $4,000.
  • The Schedule C Client works out of his house and maintained a home office in it during all of 2013. This was the only home office maintained in 2013.
  • The home office is 300 square feet.
  • The entire square footage of the house is 1,500 square feet.
  • So, the percentage of business use, for the standard method of calculating the home office deduction on Form 8829, is 20%.
  • The purchase price of the house was $200,000.
  • The total indirect 2013 expenses for Form 8829 (e.g. electric, water, gas, insurance etc.) are $5,000.

Standard Method Home Office Deduction on tax Form 8829

I’m ignoring allocation of mortgage interest and real estate taxes between Form 8829 and Schedule A because they wash out in this example.

  • The business use percentage of 20% times the indirect costs of $5000 = $1,000.
  • Depreciation for the house in 2013 is $1,026 {($200,000/39) *20%}.
  • Total home office deduction on Form 8829 is $2,026 ($1,000 + $1,026).
  • The $2,026 isn’t limited by the tentative gross profit of $4,000 on Schedule C.
  • At a 30% aggregate marginal tax rate, the home office deduction is worth $608 in tax savings.

Simplified Option Home Office Deduction

  • 300 square feet time $5/sf = $1,500, the maximum allowed.
  • At a 30% aggregate marginal tax rate, the simplified option home office deduction is worth $500 in tax savings.

Schedule C CPA discusses Pros and Cons of depreciating your home for the standard technique home office deduction

When you sell your home you recapture the depreciation claimed on Form 8829 and Schedule C. This means you have a larger Capital Gain (usually) when you sell. Currently there’s a $250,000 exclusion on capital gains from sale of your primary residence. During the Recession, exceeding $250,000 of capital gains was optimistic. And capital gains tax is 15%, half of the aggregate 30% marginal tax rate assumed in the example.

“Depreciating you primary residence may seem like a good idea today with the $250,000 capital gain exclusion and a 15% capital gains tax rate, but who knows what Congress will do later?”
– Gary Bode, Schedule C CPA accountant

I’m a CPA who handles Schedule C and Form 8829 routinely. Our virtual office makes it easy to deal with us wherever you live. So if you like what you read, don’t let distance dissuade you from calling for a free phone consult at (910) 399-2705.

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