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IRS Announces Needed Relief on Home Office Deduction!
Many small business owners operate their business out of their home. The tax laws allow a deduction for part of the expenses related to the home such as insurance, utilities and repairs based upon the square footage of the business portion to the total home size.
For example, if the business owner uses a 200 square foot room in a home with 2,000 square feet, they would be allowed to deduct 10% of their home expenses that are otherwise non-deductible plus 10% of real estate taxes and home mortgage interest. This deduction reduces self-employment taxes. They are also allowed to depreciate part of their home in addition to the other allowed deductions.
The major drawback to this deduction is the amount of time and effort spent in arriving at the deduction. The IRS has been aware of this issue and today finally released a new Procedure to help reduce this burden.
The safe harbor election allows a taxpayer to simply determine the amount of square footage used for business (which is already reported on the tax return normally) and multiply this by $5 with a limit of 300 square feet or a maximum $1,500 deduction. Additionally, the total amount of real estate taxes and home mortgage interest is then allowed to be deducted fully on Schedule A. However, no depreciation or other deductions (such as insurance, repairs, etc.) is allowed as a deduction.
This election is voluntary each year. You can take actual one year, the safe harbor the next and then revert back to actual.
The normal rules related to qualifying for the deduction still apply.
In many cases, the next deduction found on many of these returns is much less than $1,500 and this may actually result in a higher deduction with minimal effort.
This safe harbor deduction is not allowed on your 2012 tax return, but you may start using it for 2013.
Don’t Forget the Double Payroll Tax Hit!
Many taxpayers are aware that the FICA rate for employees (including their employee portion, if self-employed) has gone back to the old 6.2% which is up 2% from the temporary reduced 4.2% rate for 2011 and 2012. This increase applies on wages as paid and will also apply on any self-employment income paid with the tax return.
The other tax that may get lost in the discussion is the new Medicare surtax of .9% on earned income in excess of $200,000 for single taxpayers and $250,000 if married filing joint. If the taxpayer is employed outside of the business or earns a wage from their corporation, the employer will be required to start withholding this extra tax once the $200,000 level is reached, even if the employee is married. If the spouse does not work, then the couple may be entitled to a refund when they file their personal tax return if their total wages are less than $250,000.
If the taxpayer is self-employed, then this extra tax will be owed if they exceed the threshold amount.
This is another tax that has a marriage “penalty” built into it. For example, two single taxpayers earning $200,000 each would owe no additional Medicare tax, but if they were married, they would owe the tax on $150,000 of earnings or $1,350.
