IRS has revised Publication 587, Business use of Your Home, for use in preparing 2013 returns. The revised publication clarifies important aspects of the new optional safe harbor method of computing deductions for business use of a home, including a new, comprehensive simplified deduction worksheet.
New safe harbor. To reduce the administrative, recordkeeping, and compliance burdens of determining the allowable deduction for the qualified business use of a residence, Rev Proc 2013-13 provides a safe harbor method under which an individual determines his allowable deduction for the qualified business use of a home by multiplying a prescribed rate ($5) by the square footage of the part of his residence that is used for business purposes, not to exceed 300 square feet, for a maximum deduction of $1,500. The safe harbor is effective for tax years beginning on or after Jan. 1, 2013.
The safe harbor method doesn’t apply to an employee with a home office if he receives advances, allowances, or reimbursements for expenses related to the qualified business use of the employee’s home under a reimbursement or other expense allowance arrangement with his employer.
The safe harbor is an alternative to deducting actual expenses. Thus, if it’s used for a tax year, the taxpayer generally can’t deduct any actual expenses related to the qualified business use of that home for that tax year, with the following exceptions:
- Otherwise allowable home-related deductions. A taxpayer who itemizes deductions and uses the safe harbor may deduct any allowable expenses related to the home that are deductible without regard to whether there was a qualified business use of the home for that tax year (e.g., deductions for qualified residence interest, property taxes, and casualty losses). Taxpayers using the safe harbor method deduct these expenses as itemized deductions on Form 1040, Schedule A, and cannot deduct any part of these expenses from the gross income derived from the qualified business use of the home—either for purposes of determining the net income derived from the business or for purposes of determining the gross income limitation
- Business deductions unrelated to qualified home use. A taxpayer using the safe harbor method for a tax year may deduct any allowable trade or business expenses unrelated to the qualified business use of the home for that tax year (e.g., expenses for advertising, wages, and supplies).
A taxpayer using the safe harbor for a tax year can’t deduct any depreciation or Code Sec. 179 expensing for the part of his home that is used in a qualified business use for that tax year. If he calculates and substantiates actual expenses for a later year, he must calculate the depreciation deduction by using the appropriate optional depreciation table applicable for the property, regardless of whether he used an optional depreciation table for the property in its placed-in-service year.
A taxpayer using the safe harbor method for a tax year can’t deduct any disallowed amount carried over from a prior tax year during which the taxpayer calculated and substantiated actual expenses. He can deduct the carried-over amount in the next succeeding tax year in which he calculates and substantiates actual expenses.
Electing the safe harbor. A taxpayer irrevocably elects the safe harbor by using the method to compute the deduction for the qualified business use of a home on his timely filed, original federal income tax return for the tax year. A change from using the safe harbor method in one year to actual expenses in a succeeding tax year (or vice-versa) isn’t a change in accounting methods.
IRS’s newly revised Publication 587 provides the following insights on using the safe harbor method to deduct home office deductions.
Shared use. Taxpayers sharing a home (for example, roommates or spouses, regardless of filing status), if otherwise eligible, may each use the safe harbor method, but not for a qualified business use of the same portion of the home. For example, a husband and wife, if otherwise eligible and regardless of filing status, may each use the safe harbor method for a qualified business use of the same home for up to 300 square feet of different portions of the home.
If the qualified business use of the home is also a qualified joint venture, the taxpayer and his spouse figure the deduction for the business use separately, by splitting the actual area used in conducting business between the spouses in the same manner they split your other tax attributes. Then, each spouse figures the allowable area separately. (Where each spouse materially participates as the only members of a jointly owned and operated business and they file a joint return for the tax year, an election can be made to be treated as a qualified joint venture instead of a partnership. This election, in most cases, won’t increase the total tax owed on the joint return, but it does give each spouse credit for social security earnings on which retirement benefits are based and for Medicare coverage.)
More than one qualified business use. If a taxpayer conducts more than one qualifying business in his home, the election to use the simplified method applies to all qualified business uses of that home. However, the taxpayer still is limited to a maximum of 300 square feet for all of the businesses.
More than one home . If the taxpayer used more than one home for business during the year (for example, he moved during the year), the election to use the simplified method may be made for only one of the homes. Deductions for the other home(s) are based on actual expenses.
Part-year use or area changes. If qualified business use was for a portion of the tax year (e.g., a seasonal business or a business that begins during the tax year) or the taxpayer changed the square footage of the qualified business use, the simplified deduction is limited to the average monthly allowable square footage. Calculate the average monthly allowable square footage by adding the amount of allowable square feet used in each month and dividing the sum by 12. But when determining the average monthly allowable square footage, the taxpayer cannot take more than 300 square feet into account for any one month. And qualified business use of less than 15 days in a month doesn’t count at all.
Illustration : Able files his federal income tax return on a calendar year basis. On July 20, he began using 420 square feet of his home for a qualified business use, and used the 420 square feet until the end of the year. His average monthly allowable square footage is 125 square feet, which is figured by using 300 square feet for each month August through December divided by the number of months in the tax year ((0 + 0 + 0 + 0 + 0 + 0 + 0 + 300 + 300 + 300 + 300 + 300)/12).
Calculating the deduction under the elective simplified method. To figure the deduction for each qualified separate business use of a home:
(1) Multiply the allowable area by $5 (or less than $5 if the qualified business use is for daycare that uses space in the home on a regular, but not exclusive, basis). (2) Subtract the expenses from the business that are not related to the use of the home (e.g., cost of phone, supplies, professional fees, advertising, depreciation on equipment) from the gross income related to the business use of the home. If these expenses are greater than the gross income from the business use of the home, then the taxpayer cannot take a deduction for this business use of the home. (3) Take the smaller of the amounts from (1) and (2). This is the amount that the taxpayer can deduct for this qualified business use of his home using the simplified method.
Publication 587 carries a Simplified Method Worksheet, at pages 29 and 30, for use by employees or partners, or taxpayers that use their home in their farming business and file Schedule F (Form 1040). Taxpayers that use their homes in a trade or business and file Schedule C (Form 1040) use the Simplified Method Worksheet in the Instructions for Schedule C to figure the deduction.
If you have any questions regarding the new safe harbor method, please do not hesitate to contact us.