Tag Archives: home-based business

Good News for Home Businesses

The IRS estimates that there are about 14.4 million home-based businesses in the U.S. Of these, only 3.4 million home businesses claim a deduction for having a dedicated office space in their home.

Apparently the reason for the low number of businesses deducting home office space expense is the fear of triggering an audit, and the cumbersome method required by the IRS for calculating the deduction.

All of that is now changing with the new rules recently announced by the IRS. There is now a “Safe Harbor” rule for your home office deduction, which allows you to deduct the square footage of your office times $5.00 per square foot—up to a maximum of $1,500.

Also, multiple taxpayers (regardless of filing status) in the same home can each claim a deduction if they have separate distinct office areas in the home.

Unfortunately, this new rule doesn’t take effect until the 2013 tax year, and will not help for 2012 taxes. The rule was announced now so that we could do tax planning for 2013.

As you might surmise, there are a few restrictions involved, but they don’t seem onerous. However, you might want to check with your tax accountant for details while doing your 2013 tax planning.

The reporting process is apparently very simple, and it is estimated that this change will save small businesses a total of about 1.6 million hours annually.

Keep in mind that this change has no effect on any home business deductions other than “space.” You can still deduct all other business related expenses like business phones, computers and equipment, office supplies, advertising, etc.

And, of course, you still have the option of using the old long-form method of deducting space costs if the $1,500 per year cap is too low.

So, perhaps some of the 11.0 million home-based businesses that currently do not take a home office deduction can plan on doing just that for the 2013 tax year.

Do you think this new IRS rule for home office deductions will be a good thing for you and your business?

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Home Office Deduction

Of the 21 million non-farm small businesses in the U.S., 53 percent of them are home based. Unfortunately, these small businesses fall under most of the same tax requirements and regulations as the large corporations. That is why taking tax deductions for having your office in your home is so complex. Many of us do not even bother with this deduction any longer. The Office of Advocacy of the Small Business Administration states that, tax compliance is 67 percent more burdensome for the smallest businesses compared to their larger competitors.

Now, Senator Olympia Snowe (R-ME) has introduced a bill in the Senate to simplify home office deductions: “Home Office Deduction Simplification and Improvement Act of 2008” (S.3371), and Representative Charles Gonzalez (D-TX) has introduced companion legislation (H.R. 7074) in the House.

The issue of onerous tax regulations on small businesses has been debated for many years. I attended my first conference on this issue over 20 years ago, and little has been done—by either political party— since then.

If you have a small home-based business, I would highly recommend that you look at S.3371 and H.R. 7074. If you think they would benefit your tax situation, drop an email to your respective Senators and Representative encouraging passage.