Beginning 2013, the Internal Revenue Service is offering a simplified method that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes.
The new optional deduction is capped at $1,500 per year based upon $5 a square foot for up to 300 square feet. This will serve to reduce the paperwork and recordkeeping burden on small businesses.
While the new safe-harbor may be more convenient, in many cases the traditional ‘office in the home’ deduction would yield a greater tax savings. Between mortgage interest, real estate tax and utilities, many taxpayers exceed the $1,500 cap of the new deduction. The new deduction also has the disadvantage that if it would result in a loss it cannot be taken. This is in contrast to a regular office in the home deduction, which can result in a loss carry-forward. The new deduction also cannot be combined with a loss that is carried forward from the previous year.