The Great Recession and continuing sluggish economy has brought an uptick in the number of Americans seeking to supplement their income through self-employment activities. Artists, crafters, daycare providers, writers and other entrepreneurs that dedicate a room in their home exclusively to generating income may deduct a portion of utility costs, property taxes and homeowner’s insurance from these revenues.
In the past, taking the home office deduction has been a complicated process requiring completion of a Form 8829, Expenses for Business Use of Your Home. Often the record keeping and time required to take the deduction wasn’t worth the tax savings.
Beginning with the 2014 tax season, which opens Jan. 31, filers of 2013 tax returns may chose a new, simplified way to deduct home business expenses. The simplified method is entered directly on a Schedule C, and it does not require itemizing expenses.
With this method, the homeowner simply calculates the square footage of the room used for business purposes and multiplies by $5, up to a maximum of $1,500, 300 square feet.
For Entrepreneurs that share a home with another small business, both may claim the deduction, each on their own Schedule C, up to a combined total of 300 square feet.
The requirements to take this deduction remain the same. The space must be regularly and exclusively used for business purposes; a guest bedroom or corner of a dining room that does double-duty as an office would not qualify. It must be the principal place of business. If you have business space in an office outside the home and use a home office for convenience, the home office does not qualify for the deduction.
The IRS estimates this new method will save small businesses an estimated 1.6 million hours in bookkeeping each year.