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New Home Office Deduction Is Simpler, but Smaller (The New York Times)
The New York Times "You're the Boss" column ran a great article on the simplified Home Office Deduction featuring NASE National Tax Advisor Keith Hall.
"Keith Hall, the national tax adviser for the National Association for the Self-Employed, said that only 42 percent of his organization’s members take the home-office deduction. The most common reason for not taking the deduction, he said, is the complexity of the paperwork taxpayers must file, Form 8829. Though just a single page, the form requires taxpayers to tally up expenses such as rent, utilities, insurance, and mortgage interest and determine whether they are direct or indirect expenses, and then allocate a proportional share of each to the office. Taxpayers must also undertake a series of calculations to determine how much in casualty losses and depreciation they can deduct."
Read the full article
here .
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January 29, 2013, 1:00AM
New Home Office Deduction Is Simpler, but Smaller
By ROBB MANDELBAUM
The new simplified home-office deduction that the Obama administration unveiled earlier this month comes with a trade-off: While more of the very smallest businesses will probably opt to deduct home-office expenses for the first time, using a new streamlined form, many will get a much smaller deduction than they would if they filled out the standard form.
Karen Mills, Administrator of the Small Business Administration, and Deputy Treasury Secretary Neal Wolin, in a blog post published on the Treasury Department’s Web site, called the change “part of broader efforts to make interacting with the federal government easier and more efficient for businesses of all sizes.” The change will take effect for the current year, for taxes that will be due by April 2014.
Relatively few businesses that can take the home-office deduction have been doing so. According to the S.B.A., just over half of the country’s 28 million small businesses are based in a home. But in 2010, the most recent year for which statistics are available, only 3.4 million taxpayers claimed the deduction, according to the Treasury Department.
Keith Hall, the national tax adviser for the National Association for the Self-Employed, said that only 42 percent of his organization’s members take the home-office deduction. The most common reason for not taking the deduction, he said, is the complexity of the paperwork taxpayers must file, Form 8829. Though just a single page, the form requires taxpayers to tally up expenses such as rent, utilities, insurance, and mortgage interest and determine whether they are direct or indirect expenses, and then allocate a proportional share of each to the office. Taxpayers must also undertake a series of calculations to determine how much in casualty losses and depreciation they can deduct.
Mr. Hall said a second reason for not taking the deduction is fear of an I.R.S. audit, which he also attributed to the form’s complexity. “Statistically speaking, there is a higher chance of you being audited if you take the home office deduction than if you don’t,” he said.
But, he added, the additional risk “is not based on whether the space is used regularly and exclusively for business” — the standard for being eligible to take the deduction — “but on calculations on the form itself. There are so many places to make a mistake. On that one-page form, there are 17 references to the instructions. “It’s more complicated for a small business to take a deduction for the cost of their business premises when those premises are their home than it is for a bigger business to simply deduct its rent.”
Under the new alternative, a taxpayer can eschew all of the information-gathering and calculating and instead take a standard deduction of $5 for every square foot of office space, up to 300 square feet. According to an Internal Revenue Service spokesman, Eric Schmidt, the agency has not yet settled on how taxpayers will report the simplified deduction, or whether the agency will require a new form. However, the home office must still be used regularly and exclusively for business, and all of the other restrictions on taking the deduction remain in place for the streamlined alternative.
But for many of those who take advantage of the streamlined deduction, ease of use could cost hundreds of dollars in tax savings. Estimates of the average home-office deduction range from $2,000 (from the National Association for the Self Employed) to $3,000 (from the I.R.S.). Mr. Hall said that a $2,500 deduction for a home-based business would typically cut the total tax obligation by $750. The maximum deduction available under the easier option, $1,500 for a 300-square-foot office, would reduce a typical business owner’s taxes by $500.
For some, the trade-off might be worth it, Mr. Hall said. “Those who have smaller expenses, in the $1,500 to $2,000 range, can save themselves the headache,” he said, “since the tax savings are going to be about the same anyway.”
Mr. Hall praised the decision to create a simplified standard deduction. “Any time you can keep the underlying economics of the deduction the same and take a complex Internal Revenue Code calculation and make it simple, it’s always going to be better for the small-business owner,” he said. “And the bottom line is it’s going to free up their time to contact a new customer, create a new job, or concentrate on their business, rather than on a tax form.”