Small Business: Home-office deductions simplified
For many home-based businesses, claiming the home-office deduction has often been more of a headache than it's worth.
It can be complicated to calculate and can be perceived as an audit red flag.
But some of those issues may be resolved thanks to a new simplified option for claiming the home-office deduction that the IRS recently announced, experts said.
"It cuts out the complexity," said Tim McHale, a tax partner at Cerini & Associates Llp, a CPA firm in Bohemia.
Currently, eligible home-based businesses are generally required to fill out a 43-line form (No. 8829) often with complex calculations of allocated expenses, depreciation and carry-overs of unused deductions.
Under the simplified option, taxpayers will be able to deduct a flat rate of $5 per square foot of office space up to 300 square feet, McHale says. The deduction is capped at $1,500 and doesn't require them to break down direct and indirect expenses related to the home office, such as mortgage and property taxes, he said.
The simplified option is available starting with the 2013 return most taxpayers file early in 2014.
"I think more people will take the deduction," said Keith Hall, national tax adviser for the National Association for the Self-Employed in Grapevine, Texas.
WHO QUALIFIES FOR THE NEW OPTION
About 85 percent of the group's membership is eligible for the home-office deduction, but only about half of those take it largely because of its complexity, he said.
Another reason is fear of being audited.
"The IRS likes to audit the business use of home filers because the majority of taxpayers who claim this deduction do not actually have a 'dedicated' home office," adds Michael Hanley, CPA, managing partner of Merl & Hanley Llp in Smithtown. "They simply have a computer room or den or a work station that is set up in a room that is shared with personal-use items, or they have a home computer that is used for both business and personal uses."
The simplified option doesn't change the requirements needed to claim the deduction, says Michael T. Lauri, partner at Michael Lauri & Co. CPAs in Hauppauge. The key is your office has to be used for business exclusively and on a regular basis, he said.
If your office meets this criteria, then you can claim the deduction.
But the simplified version may not be right for every taxpayer. Eligible home-based businesses may reap a greater deduction using the existing method. For one, it isn't capped at $1,500, and it takes into account various expenses like utilities and maintenance, which can add up, says Lauri.
According to the IRS, the average home-office deduction was just over $3,000.
CAREFULLY CALCULATE WHICH IS BEST
So you have to weigh your options, which is what Kathryn Geiss and Christopher Fernan, East Northport-based partners in Rodan + Fields Dermatologists, a skin-care treatment line, will do.
"We're going to see where we stand on both ends," says Geiss, a home-based independent consultant for San Francisco-based Rodan + Fields.
They currently claim the home office deduction and will consider next filing season whether to take the new, simplified option.
The existing way is "complicated," said Fernan. While this offers a simpler option, they don't want to shortchange themselves either.
It's just another alternative to a seemingly obscure process that may encourage even those who never took it before to take the deduction.
Glenn Goldberg of Parallel Communications Group, a high-tech-focused PR firm in Baldwin, says he'll discuss with his accountant the simplified option to see if it pays to claim the deduction, which he presently doesn't take. "The simpler, the better," he notes.
In 2010, nearly 3.4 million individual taxpayers claimed the home-office deduction, according to the latest available figures.
Source: Internal Revenue Service