Office in Home Deduction

The IRS announced a new simplified formula for calculating the office in the home deduction for self-employed individuals.  You may now deduct $5 per square foot up to a maximum of 300 square feet or $1500 starting on 2013 tax returns.  The IRS believes this will reduce the record keeping burden on small businesses by 1.6 million hours annually.

The simplified formula does not require home based businesses to keep track of utilities and other home related expenses.  While the new office in the home formula does not allow depreciation of the business portion of their home, property taxes and mortgage interest may still be deducted in full on the Schedule A.

The simplified formula follows the current office in the home restrictions: such as the requirement that the home office must be used regularly and exclusively for business.  Employees can’t deduct a home office unless their employer requires them to work from home.

Small business owners will want to calculate office in the home deductions both ways to determine the largest tax savings.

Further details on the new option can be found in Revenue Procedure 2013-13.

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