Claiming a tax deduction for your home office is about to get a lot easier.
Considered one of the biggest audit red flags, the deduction can be claimed if your home office is your primary place of business and is used exclusively for work. However, the paperwork is complicated, and the legitimacy of the claims are often scrutinized.
To make the process easier for both the IRS and taxpayers, a new option will be available in 2014 for people filing their 2013 returns, the IRS announced Tuesday.
Currently, taxpayers who claim the home office deduction are required to fill out a separate form calculating the percentage of the home that is used solely for the business and the percentage of expenses that apply to the office, which can be very complicated to figure out. But starting in 2014, you will no longer need to do those calculations.
Instead, the new option will allow you to claim $5 per square foot of the office, up to 300 square feet. The deduction will be capped at $1,500 per year and the form for claiming it will be simplified.
“This will make life easier for the IRS and the majority of taxpayers who claim this deduction,” said John Lieberman, CPA at Perelson Weiner LLP. It will also encourage many people who have been scared off by the complexity of the deduction to start claiming it.
And because of the simplified form and process, the new deduction option is less likely to trigger an audit, Lieberman said.
But people who typically claim more than $1,500 for their home office — which is often the case if their rent is really high or a big portion of the home is used as an office — will likely want to continue using the current, more complicated method.
Someone who lives in a place like Manhattan and pays $36,000 a year in rent, for example, could easily take a deduction of as high as $9,000 under the current deduction, said Lieberman.
“Many people are claiming a lot more than $1,500, so they should continue using this [original] deduction, but for a majority of people who are outside of high rent or high rent areas, the new option will be beneficial,” he said.
The IRS said 3.4 million taxpayers claimed the home office deduction in 2010. The new option is estimated to save small businesses about 1.6 million hours annually because of the reduction in record keeping and paperwork.
Businesses cheered the IRS’s announcement.
“This is terrific news for the 52% of all small business that work from home,” Kristie Arslan, CEO of National Association for the Self-Employed, said in a statement. “The previous calculation for the deduction was cumbersome and time-consuming for America’s smallest business[es] and year after year hard-earned dollars were left on the table.