Over @ Bogleheads we came across the following discussion....
Form 8829 vs simplified method for home office deduction
by dhc » Sat Jan 31, 2015 5:00 pm
We bought a house this year and one of us has a business run out of our home. We qualify for the deduction; the question is, do we use form 8829 or the simplified method?
For the partial year during which we owned the home and had an exclusive space for the business, simplified method comes out to $165, while form 8829 comes out to $365 including $100 in depreciation. We're in the 15% tax bracket. I know depreciation has to be recaptured later, potentially at a higher tax bracket if we sell the home in a year with higher income, so if the difference were only the depreciation amount, I'd probably opt for the simplified method. Given the additional $100 in deduction, though, am I missing any reason we wouldn't want to use form 8829?
Thanks!
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Re: Form 8829 vs simplified method for home office deduction
by JDDS » Sun Feb 01, 2015 3:44 pm
I only understand this issue a little bit. If you only had a partial year this time, I'm guessing the gap between the methods will be larger in future years? It sounds like you can swap methods each year, but the last bullet on this page says the calculation can be dependent on the prior years method?? http://www.irs.gov/Businesses/Small-Bus ... -Deduction
Sorry I don't have more info to offer.
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Re: Form 8829 vs simplified method for home office deduction
by dhc » Sun Feb 01, 2015 4:14 pm
Yes, I expect the gap will be larger in future years.
As for depreciation calculation, my reading of that is that it's basically saying using the simplified method doesn't extend depreciation timelines or anything like that; it just makes depreciation not applicable for the year in which you use it.
Thanks for the reply - if anything, the larger gap in the future likely makes using form 8829 make that much more sense.
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Re: Form 8829 vs simplified method for home office deduction
by HueyLD » Sun Feb 01, 2015 5:38 pm
If you can only come up with $165 of simplified deduction, you only have 33 SFT of qualified space and the maxmum allowable deduction under the simplified method is $5 x 300 = $1,500.
Since your are allowed an additional $200 of deduction using the standard method via form 8829, you save $31 in payroll taxes plus $30 in federal income tax plus another amount in state income tax. Even though the dollars are small, they represent a relative large percentage of tax benefits. And as your tax brackets go up, the benefit will also go up accordingly.
As you already understand that depreciation will be recaptured in the future when the house is sold, but deductions today usual provide more benefits than some future recaptures. Moreover, as your AGI increases over the years, you will find it beneficial to be able to split home mortgage and property tax deduction between Sch. A and Sch. C because your itemized deductions may be limited by income or AMT in the future.
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