Business owners love to find ways to lower their taxes. But the IRS has lots of finicky rules for home office deductions that make it less appealing than it might seem at first glance.
But all that is about to change.
The IRS has announced a new system that will be simpler for some small biz owners starting this year—which affects the return you’d file a year from now. So you may want to update your record-keeping (and your tax plans) now.
Right now, as you know, the home office must be used regularly and exclusively for work (no kids’ homework or computer games!), and you have to itemize all your expenses related to it.
So you have to determine what portion of your home’s square footage is office space and then prorate all utility bills, mortgage interest and home depreciation by that percentage.
While the office space will still need to meet the exclusive-use test, the IRS will allow you to claim the deduction as a flat $5 times the square footage of your home office. So if your office is 10 x 10, or 100 square feet, you’ll get a $500 deduction.
No need to calculate depreciation or prorate expenses. But the maximum that can be claimed under the new method, however, is $1,500. You can still use the old method if your deductions add up to more than that.
To learn more, check out our detailed guide to home office deductions, which you’ll need for 2012.