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Good News for Home-Based Business: IRS Simplifies Home Office Deduction

January 31st, 2013 ::

By Karen Axelton

If you are a home-based business owner but have never claimed the home office tax deduction because you don’t want to deal with the complex reporting and calculation that’s required—or because you’re afraid making a mistake could trigger an IRS audit—you can breathe a little easier this April. That’s because the IRS has announced a simplified, optional method for claiming the home office deduction.

The new optional deduction allows taxpayers to claim $5 per square foot of home office space up to a maximum of 300 square feet, or $1,500 per year. Currently, small businesses and others claiming a home office deduction have to complete Form 8829, a 43-line form that includes complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers who want to claim the optional deduction instead will complete a much simpler form.

The IRS estimates the change will affect more than 3.4 million taxpayers (the number who claimed the home office deduction in tax year 2010, the most recent year for which the agency has data) and will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours per year.

Here are a few things to be aware of in deciding whether you want to claim the traditional home office deduction or the optional simplified verson:

  • Homeowners using the simplified option cannot depreciate the portion of their home used for business. However, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions do not have to be allocated between personal and business use, which the traditional method requires.
  • Since the optional deduction has a cap of $1,500, if your home office is significantly bigger than 300 square feet or if you have extremely high utility bills or other costs, you may want to stick with the traditional method of claiming deductions.
  • No matter which method you use, you still have to meet the current restrictions regarding the home office deduction. For example, the home office must still be used regularly and exclusively for business, not for personal use.

The new simplified option is available starting with the 2013 return most taxpayers file early in 2014. For more details on the new option, visit the IRS website to read Revenue Procedure 2013-13.

Image by Flickr user james.thompson (Creative Commons)