Fifty-two percent of small businesses in the U.S. are home-based. However, the home office deduction is rarely used by these entrepreneurs. I’ve personally recommended business owners shy away from it because the experts say it’s a red flag for an audit and who wants to be audited? Here’s the issue.
The Tax Code says if you use part of your home for business, you may be able to deduct a percentage of certain expenses, such as mortgage interest, insurance and utilities as a business expense. There are two basic requirements to qualify for this deduction: you must use part of your home exclusively for conduction business; and it must be your principal place of business. (This is not a comprehensive review of the regulation. Check with your tax professional.)
Despite the seemingly straight-forward language of the home-office deduction, in reality it’s difficult to understand and is too complicated to calculate the correct amount resulting in volumes of paperwork. Recognizing the home-office deduction is being under-utilized, the IRS is providing a new, simpler option for calculating the home office deduction allowing both business owners who work at home who maintain a qualifying home office to deduct up to $1,500 per year. The IRS estimates this will save 1.6 million hours per year in tax preprataration time from this simpler calculation method.
So if you haven’t been taking advantage of the home-office deduction and you think you may qualify, be sure to check with your tax preparer.