Home office deductions have been something to avoid unless you enjoy jumping through IRS hoops and relish IRS audits. Rev. Proc. 2013-13 offers taxpayers a safe harbor method for calculating the amount of home office expense attributable to business use of one’s personal residence starting in 2013. Unfortunately, like many good IRS ideas, the usefulness of this one is diminished by overly complicated rules (The Rev. Proc. is 15 pages) and the fact that the safe harbor does not resolve what portion of the residence is deemed used for business.
Home Office Deduction: Code Section 280A(c) allows a taxpayer to deduct expenses allocable to the portion of his or her residence that meets tests as to space, purpose, and use. The personal residence must be exclusively (space test) used on a regular basis (use test) as either (purpose tests):
The taxpayers’ principal place of business (includes management and administrative tasks if there is no fixed location and substantial).
A place at which the taxpayer normally (not occasionally) meets patients, customers, clients.
Even if not used exclusively for business, the deduction is available for:
A home regularly used as the sole fixed location for inventory or samples storage for a retail or wholesale business, or
A licensed day care facility regularly used to provide child, disabled or elder care services.
Separate Structure: Expenses are deductible if the structure not attached the dwelling unit and is used exclusively in connection with the taxpayer’s trade or business.
Employees: The exclusive use must be for the convenience of the employer and not the employee.
Amount: The amount of the expenditure must be substantiated with receipts, checks, etc. and the calculated and allocated between business and personal use. The deduction may not exceed the gross income from the business after first deducting non-home related business expenses.
Safe Harbour: The idea of bypassing substantiation, calculation and allocation burden sounds well enough. On a year by year basis, under the Rev. Proc., a taxpayer may elect to multiply a prescribed square foot dollar amount by the actual square feet used in the business up to a maximum of 300 square feet of usage. The initial prescribed rate is $5.00 per square foot (IRS may change the prescribed rate from time to time). Thus, the maximum amount of the safe harbor deduction is $1,500. This safe harbor deduction is claimed on Schedule C in lieu of such home related expenses as rent, depreciation, utilities, insurance, repairs, maintenance which may not be claimed is the safe harbor rule is elected.
Expenses Not Impacted:
Homeowner expenses: The safe harbor deduction is in addition to otherwise deductible home related expenses for qualified home mortgage interest and real estate taxes or casualty loses. These are deducted on Schedule A as itemized deductions, subject to the reinstated phase out limitations in 2013, and may not be deducted from business gross income.
Non-home related business expenses: Other non-home related business expenses such as advertising, postage, dedicated business phone, or supplies are still deductible on Schedule C apart from whether an office-in-home is used or not.
Not available: The safe harbor election is not available to employees who receive advances, allowances or reimbursements for use of their home office.
So what’s the problem with this simple method?
New complexity for some will detract from the relief offered. For example,
o If a taxpayer switches from the safe harbor method to actual expense allocation, the change is not a change in accounting method requiring IRS approval but complicates determining depreciation deduction calculations. Although here the complication is triggered by the taxpayer’s choice.
o Determining allowable square footage is needlessly complicated and will continue disputes as to business square footage.
o Married couples sharing the same space may find it preferable to use the actual expense method since the safe harbor limits the combined deduction to 300 square feet.
The record keeping that is saved by this safe harbor does not erase disputes about whether the home is used as stated in Code Section 280A(c) cited above; or, as stated above, what portion of the home is used for business. It does eliminate the need to document expenses, however.
The Rev. Proc. does not indicate whether independent contractors who are reimbursed for home office use qualify for the safe harbor.
The new IRS Commissioner called this a “common sense rule to provide taxpayers an easier path to calculate and claim he home office deduction.” I guess IRS has its own version of common sense, uncommonly peculiar to the agency. IRS might have created a more certain safe harbor had it also provided that the square footage allowed is predetermined percentage of the total home’s square footage, say 10%. That would eliminate the more subjective controversy about what portion of the home is used in the business.
All in all I suppose some may find this safe harbor rule helpful. At least one avoids having to complete the 43 line Form 8829. The safe harbor may also save IRS audit time by its agents not having to check documentation for actual expenses. As for me, I will still advise most clients to shy away from the home office deduction. The amounts for home-related business expenses usually turn out to be small and not worth the aggravation. For example, on audit the revenue agent may want to visit your home. Of course, there are always exceptions and the new rule at least offers relief from one small cubby-hole of tax code frustration, but not without substituting its own fresh complexities. Like “home on the range”: you can’t keep a thirsty cow away from the water trough.
© 2013 by Robert S. Steinberg, Esquire
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