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New IRS Rules Could Make Life Easier for Home-Based Tech Firms

This week, the Internal Revenue Service announced a change to its deduction for home-based offices that could make the lives of small- and micro-business owners much easier come tax time. In past years, home-based business owners had to fill out form 8829

Monday, March 24, 2014/Categories: small-business-resources

This week, the Internal Revenue Service announced a change to its deduction for home-based offices that could make the lives of small- and micro-business owners much easier come tax time. In past years, home-based business owners had to fill out form 8829, which requires taxpayers to fill out43 lines of information.

When the changes take effect, business owners will have the option of taking a much simpler deduction: $5.00 per square foot of office space for up to 300 square feet, or a $1,500 deduction. Business owners who prefer the 8829 form will still have the option of completing it as usual, but those interested in a simpler deduction calculation will be able to use the new strategy.

The changes will not be effective for 2012 tax returns (those filed this spring), but will be for 2013’s taxes (filed next year), and reflect years of lobbying efforts on the part of the National Association for the Self-Employed, a group that offers extensive support and resources for entrepreneurs.

Home Business Tax Deduction Details

If you’ve never calculated a home office deduction, here’s a refresher on what the current process entails:

  • Divide the square footage of your office space by the square footage of your entire home to determine what percentage of your home is used for business purposes.
  • Reduce property-related expenses (including property tax, utilities, repairs, mortgage interest, depreciation, or rent) by this amount, claiming it as a business expense.
  • Verify that, if you deduct more than 10 percent of home-ownership expenses (property tax and mortgage interest), you claim no more than 90 percent as a deduction elsewhere in your taxes.

The new deduction streamlines that process considerably. After claiming the $5-per-square-foot deduction, home-based business owners need only note two things:

  1. The home-office deduction will also help lower their tax burden for self-employment and for their business.
  2. Taking the simplified home-office deduction precludes small-business owners from deducting property-related expenses separately as business expenses.

Which Deduction Strategy Is Best for Your Business?

If you have a home-based technology firm in an area with high property values (such as New York or San Francisco), you may be better off sticking with the old deduction formula, which considers a home office’s cost as a proportion of the whole home’s cost.

While the newer formula is simpler, it may yield a lower deduction amount for home offices than the old calculation, making the extra paperwork worthwhile for certain firms.

If your business is in an area with lower property values, though, the new home office tax deduction could save you serious time without significantly impacting your overall tax burden.

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