Home Office Deduction
There have been TWO major changes in the tax law concerning home offices, one relatively recent (in the last 15 years), and another very recent one that will affect your 2013 return. The older ruling took effect in 1999 and changed the qualification criteria for a home office. This ruling was fought all the way to the Supreme Court and caused a momentous change. It is very tax-payer friendly and particularly so for massage therapists.
This ruling changed the definition of a home office from the “place where the work is performed” to the “place where the business is managed“. Under the old ruling, a massage therapist could deduct a home office only they performed massage there. Zoning restrictions, as well as personal concerns, caused a home office of this type to be an unrealistic possibility. The new ruling meant you could now deduct your home as an office as your massage business’ “management office” even if you performed ZERO massages there. This was allowed with the caveat that you do not have the availabilty of this “management space” where you DO perform massage.
As massage therapists, many of us work in beauty salons, doctor’s offices, health clubs and in other peoples homes and offices, most of which allow you the use of the massage space only and not office space to administer your business If this sounds like you, congratulations, you qualify!
The more recent ruling does not change the qualification requirement (fortunately), but changes the way you may calculate the deduction. The previous method involved you measuring the square footage of your home office space and dividing that number into the total square feet of your residence. Be sure when you measure your home office space that that space is EXCLUSIVE for the management of your business. Do not count common areas, shared hallways or any space that is used for personal use (the IRS is very strict about this). Once you do that division, that percentage is what you use to calculate your deduction for all the expenses relating to the cost of maintaining that home (rent, utilities, garbage pick-up, pest control, burglar alarm, etc.)
Beginning in 2013, the IRS is allowing a new “simplified” way to calculate your deduction. You simply measure your space, and take $5/square foot as your deduction, up to a maximum of 300 square feet for a deduction not to exceed $1500/year. This method means no need for any division to calculate your percentage and no need to keep all the pesky receipts for all those home expenses either. Easier? Absolutely! Simpler? For sure! Better? Not so fast!
Let’s say you use the older method and you calculate that your home office is 15% of your residence. You are paying $1000/month in rent. Your deduction for rent alone is $150/month, or $1800 per year, already more than the $1500 maximim allowance under the new method! And with the old method, you can still add the deductions for 15% of your utility bill, property tax, garbage pick up, etc., as well as any expenses for the room itself! Heck, you might buy a couch for the room (deductible) which costs $1500 alone! So, the bottom line is although the new method may be easier, the old method will almost certainly result in more deductions for you.
Keep in mind that this new method has not replaced the old. It is just a new option for you. Choose wisely, and happy deducting for 2013!
Want to learn more? I am Paul Kirchhoff, LMT. I teach the LMT’s Tax Workshop for the LMT Success Group, which covers dozens and dozens of deductions to reduce your income taxes to the bone! The class is only $75 and is approved for 4 NCBMTB CE hours. That fee includes our book (available only to class members); entitled “Tax Tips for the Self Employed Bodyworker“.
Disclaimer: The information below is an opinion based on my research and is not intended to substitute for the services of a qualified tax professional. I encourage you to do your own research to verify the information below. Reference some internet sites (as I have) to assist you in forming your own opinion.