March 4, 2014
A nice home office is often one of the biggest perks of being a freelancer, and it can also provide you with a significant tax deduction if you qualify for it. Up until this tax year, the calculations needed to claim the home office deduction were complex and required meticulous record keeping and a separate form (Form 8829). However, starting with your 2013 tax return, the IRS has introduced a simplified method for calculating the home office tax deduction. This reduces the paperwork but also caps it at $1,500, which raises the question: Should you use it, or stick with the standard regular method?
The beauty of the new simplified home office deduction is that it easily allows individuals who have a legitimate home office (see the IRS website to see if you do) to take a tax deduction of up to $1,500. To calculate this deduction, multiply the square footage of your home office space by $5, to a maximum of 300 square feet, or $1,500. The deduction is then entered on Schedule C of your 1040 return. You don’t have to provide any documentation to claim it, unlike the old “actual expense” method, which involves calculating, allocating, and substantiating your home office expenses.
If you use the simplified method, you can also deduct your mortgage interest and real estate taxes separately on Schedule A if you itemize. However, because it imposes a cap of $1,500 and eliminates the opportunity to deduct depreciation or carryover any losses from a previous year, this new deduction may not necessarily be the best option—especially if you can claim a higher amount using the actual expense method and you keep good records of your eligible home office expenses, such as mortgage interest, insurance, utilities, repairs, and depreciation.
In contrast, the regular method allows deductions for a home office that are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you will need to figure out the percentage of your home devoted to your business activities. The bigger your home office is, and the more eligible expenses you have, the more likely the actual expense method will yield a larger tax break than the $1,500 ceiling imposed by the new simplified home office deduction.
This tax year, it may be worthwhile to compare the size of the deduction you can take using both the new simplified method and the regular method. It is important to note that with either method, you can only reduce your business income to zero; you can’t take a loss. However, if you find that you prefer one method over the other, or you think that you will exceed the $1,500 allowed by the simplified method one year, but not the next, you can switch the method you use to calculate the deduction from year to year.
Small business owners in many communities offer downtown trick or treat events. Take advantage of this opportunity to build your business reputation. Involvement in local events goes a long way with both existing and prospective customers—indicating a vested interest in your community. Find creative ways to make your business stand out this trick-or-treat season. We hope the following suggestions will spark fun promotional ideas:
Any business that deals with financial data is a target for today’s aggressive cybercriminals…and accounting firms are not exempt. Because of the sensitive information we possess, accounting professionals have moved to the top of the hacker’s hit list. Just consider that a single tax return includes the taxpayer’s name and Social Security Number, as well as address, phone number and bank account numbers. It’s a treasure trove of sensitive data that cybercriminals crave.
October marks Women’s Small Business Month, and we are happy and proud to recognize women in business both locally and around the world. Successful business women of the past and present continue to forge new paths for female entrepreneurs. We celebrate all those who are breaking the glass ceiling and serving as role models and mentors to women everywhere.