By William R. Stromsem, CPA, J.D.
On January 15, 2013, the IRS announced an easier path for eligible taxpayers to claim the home-office deduction. Rev. Proc. 2013-13 (.PDF) will make the office-in-home deduction simpler and safer for many taxpayers, but it comes at a price for others. For 2013 returns (next filing season), an optional safe harbor will allow a deduction of $5 per square foot for up to 300 square feet.
The taxpayer can also deduct home mortgage interest, real estate taxes, and casualty losses on Schedule A without having to allocate a portion of these expenses to the office. Other office expenses unrelated to the home (like supplies but not like a portion of the utilities) will be fully deductible as business expenses. However, depreciation on the business portion of the home is not allowed.
The new optional method will avoid complexity and potential errors, including: depreciation and basis calculations; allocation of costs between business and personal use of home; limitation of the deduction to revenue in excess of expenses that would have occurred if there were no office in home; and carryover of unused losses.
The IRS will provide a new form for the simplified home-office deduction. Another advantage of using the simplified method is that it avoids possible controversy when the home is sold and the taxpayer claims the exclusion for a principal residence.
The main disadvantages of the new optional method are that depreciation or section 179 deductions are not allowed for the home, and the office-in-home deduction is capped at $1,500. In general, the simplified deduction will be less advantageous to those with larger offices and more expensive homes.
For those clients who claim the office-in-home deduction on 2012 returns, check if the amount is enough over the $1,500 maximum to warrant the greater complexity of collecting and providing the information required by the 43 lines of Form 8829 and the possibly greater audit nuisance risk (see next paragraph).
The revenue procedure allows taxpayers to choose annually between using the safe harbor and actual expenses, although depreciation calculations are a little complex when changing to actual expenses after using the simplified method. The deduction cannot exceed the amount of “net” income resulting from the home office (this calculation doesn’t include overall home expenses like utilities, insurance, and depreciation), and there is no carryover of the unused deduction.
Another big issue that is of concern to many taxpayers is the nuisance potential for audits of offices in homes. For those who use the simplified method, the tough requirements for qualifying for an office in home must still be met; e.g., regular and exclusive use and for employees, that it be for the convenience of the employer. However, there will be fewer issues and opportunities for errors in the computation, and there will be less incentive for the IRS to audit because of the limited amount of the deduction. Unfortunately, for those who don’t use the simplified method, the Form 8829 may trigger increased audit focus because its use identifies a larger home-office deduction with more complexity and opportunities for errors and issues.