NEW YORK (MainStreet)The Internal Revenue Service has issued a new rule to make it easier for home-based business owners and some home-based workers to save both time and money. For the 2013 tax year, rather than itemize business expenses, qualified taxpayers with home offices can choose to take a deduction of $5 per square foot of home-office space for up to 300 square feet for a maximum of $1,500.
There are at least three groups of home business owners who will benefit from the new rule, according to Xavier Epps, a financial advisor and IRS-registered tax return preparer at XNE Financial Advising.
Home-based small business owners who would otherwise skip this deduction because of the length of the tax form and lack of proof for expenses will benefit the most from the flat rate option, says Epps. So, too, will those who hire a tax professional due to the complexity of the tax forms, if they have a relatively simple Schedule C, because they will be able to forgo tax preparation fees, he says.
A third group that could benefit are those qualified taxpayers who take a full deduction of their mortgage interest, real property taxes and homeowners insurance on Schedule A but who would normally be required to reduce their Schedule A deductions by the amount claimed on their business and, in essence, lose out on a portion of the deduction on Schedule A due to the reduction, says Epps. Now they can simply take up to 300 square feet of the home and receive $5 per square foot without reducing the Schedule A itemizations.
However, for many taxpayers, the new "safe harbor" method may cost them more of both time and money, say tax experts, because they will have to calculate the taxes using both methods and compare outcomes. And, there are some caveats.