The IRS says that almost 3.4 million taxpayers claimed deductions for business use of a home in 2010, the most recent year for which data are available. But many people eligible for the deduction might not be doing so because it's too complicated to work out, according to the National Association for the Self-Employed.
A study by the association found that 42 percent of the organization's members who qualify for the deduction don't take it.
"They don't take the deduction, because they fear if they take it and make a mistake, it will trigger an IRS audit," said Kristie Arslan, president and chief executive of the association.
Currently, if you qualify for the home-office deduction, you have to fill out a 43-line form that requires calculations of allocated expenses, depreciation and carryovers of unused deductions. Just thinking about it makes my head hurt.
Sixty percent of association members said that if there were an option to take a standard home-office deduction rather than itemizing, they would take it.
Under the new option, taxpayers can fill out a simpler form, but the deduction is capped at $1,500 per year based on $5 a square foot for up to 300 square feet.
The home-office deduction is available for homeowners and renters. Arslan said that if the space you dedicate qualifies, then all of the costs associated with maintaining that part of your home - mortgage interest, insurance, utilities, repairs and depreciation - would be deductible. What's not changing is the requirement that a home office be used regularly and exclusively for business. And the key here is "regular and exclusive."
It's the exclusive part that can get folks in trouble. You have to dedicate a specific area of your home to conduct your business or trade, or to meet with clients or customers. You do not meet the requirements of exclusive business use if the area of your home is also used for personal purposes.
Here's an example from the IRS. Let's say you're an attorney who uses the den or family room to write legal briefs or prepare other documents for clients. The family also uses the room to play games or watch television. The room is therefore not exclusively used for business, so you can't claim the deduction.
To find out what qualifies as a deductible business expense, visit irs.gov and search for "Deducting Business Expenses" and scroll down to the section on "Business Use of Your Home." The deduction can be limited based on the income of your business or if your business is losing money. All this makes my head hurt even more. Thankfully, there's a short video on YouTube that also explains how to qualify for the deduction. Search for "home office deduction."
If you want to comment on the simplified home-deduction option, you can email email@example.com. Put "Revenue Procedure 2013-13" in the subject line.
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