Small Business Finance News

IRS 2013 Home Office Deduction

Written by Tim Morral
Published: 1/22/2013

The IRS announces a rule change that simplifies the calculation of the home office deduction for the 2013 tax year.

For small business owners, home office deductions play a role in effective tax management. Rather than renting space, many businesses can be successfully operated from home, lowering the company's overhead costs and reducing the owner's end-of-year tax liability.

IRS 2013 Home Office Deduction

Until now, home office deductions have required a calculation method that involved depreciation and other factors. Although this method hasn't discouraged entrepreneurs from taking advantage of the deduction (3.4 million taxpayers used the deduction in 2010), it has brought an unnecessary amount of confusion and complexity into tax reporting.

To simplify the process, the IRS recently approved an alternative calculation method for the home office deduction. Starting with the 2013 tax year, home-based business owners have the option of multiplying the square footage used for business purposes by $5, for a maximum deduction of $1,500.

According to the IRS, the new rule will save small businesses 1.6 million hours in paperwork and recordkeeping each year.

"This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction," said Acting IRS Commissioner Steven T. Miller. "The IRS continues to look for similar ways to combat complexity and encourages people to look at this option as they consider tax planning in 2013."

Home-based entrepreneurs still need to meet standard IRS criteria to qualify for the home office deduction including the use of the home workspace as the primary place of business. The space must also be used exclusively for work-related purposes.

In addition to the home office deduction, small businesses are encouraged to investigate other tax deductions for home-based business owners. Although some of these deductions may seem inconsequential, the aggregated tax savings can amount to hundreds or even thousands of dollars at year-end.

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