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The IRS recently announced a simplified option that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes. The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses. The new option is available beginning in 2013.
Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A, if they choose to itemize their deductions. These deductions need not be allocated between personal and business use, as is required under the regular method.
Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, can still be fully deductible. Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.
In tax year 2010, the most recent year for which figures are available, the IRS indicates nearly 3.4 million taxpayers claimed deductions for business use of a home. Please contact our Westchester CPA firm if you would like more information on the home office deduction or any other tax compliance or planning issue.
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