New IRS Rules for Home-Based Businesses

IRS rules for home-based businessTaking the home business deduction on your taxes used to be a messy process, but recent updates to the IRS tax code have made the process much easier.

Starting in 2013, you can take a much simpler, “safe harbor” option for claiming your home office space on your personal taxes.

What Happened

According to the IRS, 3.4 million people took the home business deduction in 2010. However, a study by the National Association for the Self-Employed found that only 58% of those who qualify for the deduction end up taking it.

NASE argues that the original deduction form, at 43-lines, was too complicated for home business owners to confidently fill out. Therefore, they refrained from taking any deduction at all, for fear that they would do so incorrectly, thus incurring an audit.

The IRS has now changed how home businesses can take their deduction. They can choose to fill out the original form, or they can fill out a much simpler form. The original Form 8829 includes calculations of allocated expenses, depreciation and deduction carryovers. Starting in tax year 2013, business owners can claim the optional deduction instead, which allows them to easily claim $5 per square foot of home office space up to $1,500.

Related: Starting a Business from Home: The Ultimate Checklist

What the Rules Are

No matter which form you use to take the home office deduction, it can only apply to space within your home that is used regularly and exclusively for your business. If your kitchen table doubles as your office, you cannot take any deduction.

If you have a desk in the corner of your living room that you use solely for your business, you can claim a deduction for that area. This is true of both claim forms. The differences between the new option and the original Form 8829 include:

  • You cannot use the new option to depreciate the part of your home that you use for business.
  • You can use the new form and still claim mortgage interest and property tax deductions on Schedule A by not differentiating between personal and business use of the home.
  • You cannot use the new form to claim more than 300 square feet of home office space. If your home office is larger than 300 square feet, you will benefit more by using Form 8829.
  • You cannot use the new form to claim utility bills or other costs that exceed the $1,500 cap.

Related: Get organized for tax season with tax software

How It Affects Your Business

The new option enables you to file a home office deduction in a simpler way. It precludes the need for you to calculate how you allocate all of your expenses between your business and your home. If you have never claimed a home office deduction for fear of making a mistake and triggering an IRS audit, you can now do so without worry.

If you prefer to use Form 8829 to more accurately deduct your home business expenses on your taxes, you will still have that option – Form 8829 has not changed. Whether you decide to use the new option or the old form will depend on the size of your home office space, the amount of expenses you wish to claim, and how comfortable you are with tax law. The new option will go into effect for tax year 2013.

Megan Webb-Morgan

Megan Webb-Morgan

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Megan is a writer with 3 years of writing, editing, blogging, and social media experience. She’s been an author on sites such as AllBusiness, Business2Community and Virtual-Strategy. Topics of interest include: business technology, employee engagement and small business best practices.

She has a Master’s degree in history from SUNY Brockport and received her B.A. degree at SUNY Geneso. Megan is an East Coast original who recently moved to the San Diego area. On the weekends, she enjoys spending time with her husband.

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