Last week one of my new clients said that their prior tax-preparer had told them that they shouldn't take a tax deduction for their home office because it sent up red flags to the IRS. In this video I discuss why he could, and should, take the deduction. I also cover what you should do to document your business use.
The SBA estimates that there are 14 million home-based businesses, but only 3.4 million of these home-based businesses claimed the home office deduction in 2010. Keith Hall, the national tax advisor for the National Association for the Self-Employed, said that the main reasons for not taking the deduction were the complexity of Form 8828 (Business Use of Your Home) and fear of an IRS audit. For years, many tax advisors correctly advised their clients that there is an increased chance of being audited if they claim the home office deduction.
Starting in 2013 (returns due April 15, 2014) taxpayers can elect to use a simpler standard deduction of $5 per square foot, with a maximum of 300 square feet. This will result in a maximum $1,500 home office deduction. Using this simplified method eliminates the capital gains tax on the profit from selling your home. Additionally, the use of the simplified method allows the taxpayer to deduct home interest and property taxes in full on the Schedule A – Itemized Deduction Form. The old method required you to subtract the portion of these expenses claimed as a home office deduction before deducting the rest on Schedule A3.
You may still use the old method if you use more than 300 square feet of your home in your business, and it would result in a higher deduction.
Be warned—the IRS still requires that the home office be used exclusively for business
purposes. If you use the kitchen table or the coffee table in your living room, you most likely will not qualify for the deduction. You must be prepared to show that you use all or a portion of a room strictly for business. I recommend taking pictures of the space being used in order to have proof to provide to the IRS.