By Bert Seither, Director of Operations at Corporate Tax Network

About the author: Bert Seither is the Director of Operations at Corporate Tax Network, a national accounting and business development firm. For nearly 10 years, Seither has assisted small business owners to help put their companies on a path to prosperity.

The Internal Revenue Service has revamped the popular home office deduction for home-based business owners. This alternative deduction option is set to take effect for tax year 2013, meaning any tax returns filed in 2014 will be able to use it.

The home office deduction has long been known for being difficult to claim because of the tremendous amount of recordkeeping involved in documenting the expenses for it. It has also required taxpayers to take itemized deductions when claiming these costs as a write-off. However, the IRS has designed a new option that simplifies the process, saving business owners both time and money.

Under the new option, taxpayers can now deduct $5 per square foot of home office space, with a maximum deductible amount of up to $1,500. This new flat-rate option reduces the substantial amount of expense documentation for the traditional method, which involves tabulating the actual expenses of business-related costs incurred within a residence.

Although this new option should be beneficial to many small business owners, it’s not for everyone. Tax experts believe that this deduction route is generally more applicable to taxpayers who live in areas where the cost of living is lower. Because of this, business owners who reside in areas with higher property costs may benefit more from taking the traditional deduction route when claiming home office expenses on their tax returns.

The standard home office deduction will remain on the books for tax year 2013 and moving forward. To calculate this deduction amount, taxpayers generally must determine the percentage of a home that is used for business activities. Once this percentage is calculated, the percentage of expenses used for the office space within a residence can then be determined, and this is the amount that is deductible.

In general, the home office deduction offers a great opportunity for small business owners to deduct many of the expenses they incur when operating a business out of a residence. It’s a great way to help them keep more of the hard-earned income they make. Qualifying expenses may include mortgage interest, insurance, rent, utilities, home repairs, and even Internet access. If you plan to claim this deduction, the main thing to keep in mind is that all of these costs must be directly associated with the use of a designated area of your residence that is exclusively utilized for business purposes. This area could be an entire room or simply a specific part of a room, such as a corner.

Home office expenses fall into only one category of the numerous deduction opportunities available to small and home-based business owners. Other tax deductions worth considering for those who work from home include the vehicle deduction and the medical expenses deduction for self-employed individuals. Business owners are constantly seeking ways to hang on to more of the money they bring in, and using tax deductions can be a big step toward that goal.

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Bert Seither

Bert Seither is a small business consultant who helps small business owners find the proper entity structures, get on track with their IRS tax situations, and find a path to prosperity. He has assisted thousands of clients in his 10+ years of experience.