Monday, January 21, 2013

Why You Might (Finally) Take the Home Office Tax Deduction

The home office deduction has long been a paperwork nightmare for American taxpayers, including many of the millions of small business owners who work from home. Existing IRS instructions for the tax break run to 28 pages (which is actually shorter than in prior years). Small business lobbyists have been asking Congress to simplify the process for years.
In a blog post Tuesday, the Obama administration announced the home office break will become easier to claim for the 2013 tax year. That means we’re still more than a year away from the new rule making a difference in your wallet. The change could save taxpayers a collective 1.6 million hours in tax prep time next year, the IRS estimates (that’s more than 182 years, if you’re counting).

Under the new option, you get to write off $5 per square foot of home office space, up to $1,500 for 300 square feet. The current process involves a 41-line calculation form that requires taxpayers to, among other things, measure the total area of their homes, the area of their home offices, and then calculate the percentage of the home used for business.

It’s the kind of glut of fine print in the tax code that drives people crazy—and discourages them from taking deductions. Kristie Arslan, president of the National Association for the Self-Employed, praised the move in a statement, saying “it will provide our members some relief next tax season by allowing them to take an important deduction they long have qualified for but often forsake due to past complexity.” The new IRS rules aren’t final yet, and those seeking to deduct more than $1,500 will likely have to stick to the lengthier process.

Last year I dove into the convoluted history of this piece of the tax code. With no clear definition for what sort of work at home allowed for a write-off, the original home office deduction was open to abuse:

That loose, fuzzy standard invited generous interpretation by the likes of Stephen Bodzin. Himself an attorney for the IRS, Bodzin tried to write off part of his rent because he did some work at home in the evenings and on weekends. In 1975 (eight years after the tax return in question), Bodzin lost his case against the agency he worked for when an appeals court found that his home wasn’t his place of business. Rather, “he sometimes, by choice, did some of his reading and writing at home.”

The following year, Congress passed a tax reform law that narrowed the home office definition to prevent taxpayers from abusing the deduction.

Today’s news does beg the question: If the IRS can just change the rule without an act of Congress, what took them so long?

BLOG: Four 2013 Tax Lessons for Small Business Owne


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