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?