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 IRS wants to make it easier for you to file for deductions on the business-related use of your home.
Rather than the complicated 43-line form you now have to fill out to claim a write-off - involving computations ranging from depreciation to utility bill expense allocations - the Internal Revenue Service has come up with a much simpler option that allows you to measure the square footage of your business space and apply for a deduction.
The move comes at a time when the use of homes for work is soaring, thanks to technologies such as high-speed Internet and Skype.
The new IRS option plan, which will be available for 2013 and beyond, allows owners and employees who work from home to deduct $5 per square foot of home office space per 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.
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 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 business use.
Though this method can produce sizable deductions, critics have long argued that the computations can be tricky and require significant record keeping and time expenditures to get exactly right. Plus the IRS has acknowledged that the presence of a home office deduction on a filing may increase that taxpayer's potential for being selected for audit.
The new streamlined approach essentially boils everything down to just one measurement: How much square footage that qualifies for business purpose treatment are you using? Multiply that number by $5 per square foot and you've got your deduction amount. As long as this does not exceed $1,500, you can use the new short form write-off. If the total is more than $1,500, you can use the more complicated option, which is spelled out in IRS Form 8829 and available at IRS.gov
The new option should be a money-saver for small-scale enterprises and startups, says an expert at the American Institute of Certified Public Accountants. 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 complicated traditional method because it can yield them much higher write-offs.
Kenneth Harney's email address is email@example.com