IRS Eases Up on Home Office Deductions

If you’re one of the millions of homeowners and renters who work or run a business from the place you live, here’s some good news on taxes: The Internal Revenue Service wants to make it easier for you to file for deductions on the business-related use of your home.

The new IRS option, which will be available for the 2013 tax year and beyond, allows owners and employees who work from home to deduct $5 per square foot of home office space a year, up to a maximum allowable space of 300 square feet. The write-off is capped at $1,500 per year, but the hassle factor is negligible.

Here’s how it works. The Internal Revenue Code permits you to deduct expenses for a home office that is used “exclusively” and on a “regular basis” as your principal place of business “for any trade or business,” or as a place to meet with clients or customers. Provided that you qualify on these threshold tests, the code allows you to deduct mortgage interest, property taxes, rent, utilities, hazard insurance and other expenses based on the percentage of the total space of the home that is attributable to your business use.

The pros and cons of the new option? Abe Schneier, senior technical manager for taxation at the American Institute of Certified Public Accountants, says it should be a money-saver for small-scale enterprises and start-ups. “Anybody who’s going to start a new business working from home will probably find this a great advantage,” he said.

On the other hand, owners whose operations require large amounts of space and who have sizable utilities, insurance and other expenses probably will want to stick with the traditional method — complicated though it can be — because it can yield them much higher write-offs.

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