Easier Tax Form, Smaller Deduction (Wall Street Journal)

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Easier Tax Form, Smaller Deduction (Wall Street Journal)

NASE Member Council member Tiffany Washington was quoted in the Wall Street Journal, discussing the new simplified Home Office Deduction!

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Easier Tax Form, Smaller Deduction


Business owners generally don't like paperwork – particularly when it comes to filing taxes. So many owners welcomed the news this week that starting next year (when it's time to file 2013 tax returns), they'll have the option to take a new home-office deduction that is easy to calculate.

The new option allows qualified taxpayers to deduct annually $5 per square foot of home-office space on up to 300 square feet, for as much as $1,500. This method is more straightforward than the current 43-line tax form, which asks the taxpayer to "see instructions" 17 times and requires calculations that account for mortgage interest, insurance, repairs, utilities and other costs associated with the home.

But some accountants warn business owners not to jump so quickly to the easier deduction method.

In certain circumstances, they say, the longer form will still be worth the effort because it can offer business owners a greater deduction than the maximum $1,500 available through the simple calculation.

"It's very possible you can get double" the deduction amount, says Cathy Goldsticker, tax partner at Brown Smith Wallace LLC, in St. Louis, Mo. "And you want to get the greatest deduction possible if you are self-employed because it reduces the self-employment tax in addition to income tax."

Nearly 60% of individuals who have a home office do not take the home-office deduction, according to a 2008 survey of 156 members of the National Association for the Self-Employed, a Washington D.C. organization that has lobbied for a standard home-office deduction. Of those, 21% said they don't take it out of concern that using it would trigger an audit by the Internal Revenue Service.

Now, some business owners may choose the easy form because "they'd rather be safe than sorry... especially if they are unsure how to do the long form or are scared of being audited," says Tiffany Washington, owner of Washington Accounting Services Inc. in Waldorf, Md. "But on average, they probably will get more than $1,500" by doing the long form, she adds.

There is only one way to know which method will yield the greater deduction: Calculate and compare both methods, says Ms. Washington.

The complex form may be a better choice for businesses running at a loss because the deduction can be carried forward to future years using that method.

"In the easy version, it's use-it-or-lose-it, whereas going the traditional way, you can carry [the deduction] forward to a year when you do have business income," says Ms. Goldsticker.

For business owners who have taken the deduction in the past, the complex option is less daunting because much of the information remains consistent year after year.

But for a new business owner, particularly one that "has plenty of business income and doesn't want to go through checkbooks and monthly payments … this [simpler option] is a good choice," says Ms. Goldsticker. "It all depends - what is their pain tolerance for accumulating documentation?"

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