Home Office Deduction...Simplified by the IRS?

16 January 2013 / Uncategorized / Comments Off on Home Office Deduction...Simplified by the IRS?

Wait...the IRS actually made something EASIER!?!?

On Tuesday, the IRS released Revenue Procedure 2013-13, which gives taxpayers an optional safe-harbor method to calculate the amount of the deduction for expenses for business use of a residence during the tax year, beginning with 2013!

Individual taxpayers who elect this method can deduct an amount determined by multiplying the allowable square footage by $5.  The allowable square footage is the portion of the house used in a qualified business use, but not to exceed 300 square feet.  The maximum a taxpayer can deduct annually under the safe harbor is $1,500. The IRS may update the $5 allowance from time to time (of course they didn't index it for inflation...that would have been intelligent!).

Electing the safe-harbor is done on a timely filed original tax return (avoiding Form 8829!! YES!) and taxpayers are allowed to change their treatment from year-to-year. However, the election made for any tax year is irrevocable.

No depreciation is allowed for the years in which the safe harbor is elected, but it is permitted in the years in which the actual expense method is used. The revenue procedure has detailed examples of how depreciation is calculated in a year subsequent to a year the safe-harbor method is used.

To use the sale-harbor method, taxpayers must continue to satisfy all the other requirements for a home-office deduction, including the requirement that the space in the residence used as an office be used exclusively for that purpose and the limitation that an employee qualifies for the home-office deduction only if the office is for the convenience of the taxpayer’s employer.

The deduction under the safe-harbor method cannot exceed the amount of profit, and a taxpayer cannot carry over any excess to another tax year. If a taxpayer uses the actual expense method for calculating the deduction and has had his or her deduction limited by the gross income limitation in that year, the taxpayer can deduct this amount in the next year he or she uses the actual expense method, but cannot use the disallowed amount in a year he or she elects the safe harbor. This limit on carryovers for the safe-harbor method means taxpayers must be careful before electing it to be sure they will not lose any of their deduction.

Taxpayers sharing a home ( roommates or spouses, regardless of filing status), if otherwise eligible, may each use the safe harbor method provided by the revenue procedure, but not for qualified business use of the same portion of the home. The revenue procedure contains detailed rules for use of the home for part of the year. It allows taxpayers who have a qualified business use of more than one home for a tax year to use the safe harbor for only one home, but it permits them to use the actual expense method for the other homes.

You can read more about this on the IRS website at:

http://www.irs.gov/uac/Newsroom/Simplified-Option-for-Claiming-Home-Office-Deduction-Starting-This-Year

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