The Internal Revenue Service reminded home-based businesses and their tax preparers Friday about a new simplified option for claiming the home office deduction that is available for the first time this year, allowing home businesses to deduct up to $1,500 from their taxes.
In tax year 2011, the most recent year for which figures are available, approximately 3.3 million taxpayers claimed deductions for business use of a home, commonly referred to as the home office deduction, totaling nearly $10 billion.
The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually. The IRS and the Small Business Administration announced the new option in January of last year, but it wasn’t available until this tax season (see IRS Offers Simpler Option for Calculating Home Office Tax Deduction).
The new option is available starting with the 2013 return taxpayers are filing now. Normally, home-based businesses are required to fill out a 43-line form (Form 8829), which often involves complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Instead, taxpayers claiming the optional deduction can complete a short worksheet in the tax instructions and enter the result on their return this year.
While homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.
Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees, are still fully deductible.
Long-standing restrictions on the home office deduction, such as the requirement that a home office be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.
Further details on the home office deduction and the new option can be found in Publication 587, posted on IRS.gov.