IRS’ new, simplified home office deduction alternative waiting to gain traction

   The Internal Revenue Service recently announced a new, simplified “safe harbor” tax deduction for home office use, but two area accountants say it does not appear to be one that will gain widespread acceptance.
   The IRS estimates that its simplified option could potentially reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.
   But despite the fact that the new regulation makes the process much simpler, the incentive for owners of home office businesses, area CPAs contend, is not sufficiently attractive to encourage them to take advantage of it.
   The rules adopted by the IRS in this regard do not actually change any existing regulations, accountants say, but instead provide an alternative in the form of an easier methodology for calculating the home office tax deduction. Eligible taxpayers can claim a deduction of $5 per square foot of home office space up to a maximum of 300 square feet for a deduction that is limited to $1,500. Taxpayers are also entitled to change from one year to the next with regard to which deduction they use.
   According to Mike Fitzgerald, a CPA and one of the principals at Scheffel & Co., using the deduction as it is made available in this new alternative format eliminates the requirement for the detailed documentation found in the existing, more complex process.
   Fitzgerald says he does not see the new rule as being very attractive except in cases where the taxpayer does not keep any records and wishes to go the easier route of calculating the $5 per square foot total. But there will likely be a limited number of individuals in those kinds of situations, he adds.
   Ken Diel, managing member, CPA and a certified valuation analyst at Diel & Forguson LLC, says he cannot see where taxpayers using the new safe harbor procedure would gain any real advantage over the way that home office deductions have been and are currently calculated using the longer-standing IRS method.
   “Most people with home office businesses already have very good record keeping in place anyway,” said Diel, “so there is no justification in such instances for them to consider the safe harbor alternative. I don’t think that many people will use this.”
   Diel adds that the IRS implemented this simplified deduction process in order to afford taxpayers a less-complicated method of entering their home office use into their returns if they choose to. He cautions that although this more simple deduction mechanism has been put into place as a choice for home office taxpayers to consider, it is not “audit proof” any more so than any other deduction is.
   Since most home office users have been submitting the traditional itemized deduction information with their returns, according to Diel, there isn’t a real incentive to change to this new approach – especially because, in many cases, the status quo proves to be more financially beneficial.
   The new safe harbor regulation does not alleviate the many specific requirements for home office use to be allowed as a tax deduction by the IRS, Fitzgerald says.
   Filers who may choose to use this still have to go through all the hoops and be able to prove that they meet all the qualifications for a home office, accountants agree.
   Items that taxpayers using the safe harbor deduction do not have to be concerned with, according to Fitzgerald, include utility costs, dwelling insurance, depreciation and other factors; such are not included in the new IRS regulation. A possible drawback of the safe harbor regulation, he notes, is that there’s no depreciation of the home provision allowed – something many taxpayers have been sure to include with their deduction information as part of the traditional deduction.
   According to New York-based CDB Research & Consulting Inc., out of an estimated 26 million Americans who have home offices, only 3.4 million taxpayers claimed home office deductions on their 2012 tax returns.