The IRS announced a simplified option that many owners of home-based businesses, and some home-based workers, can use to figure their deductions for the business use of their homes. (IRS Revenue Procedure 2013-13)

The new option is effective beginning January 1, 2013, so it will be available for tax returns filed in 2014. It is an alternative to the current calculation, allocation, and substantiation requirements. However, because the new option has limits, a taxpayer may get a larger deduction by continuing to use the current rules.

The optional deduction is capped at $1,500 per year based on $5 a square foot for up to 300 square feet.

Current rules: A taxpayer is generally required to fill out the 43-line IRS Form 8829. It may contain complex calculations of allocated expenses, depreciation, and carryovers of unused deductions.

New rules: Taxpayers claiming the optional deduction will complete a different, simplified form. They cannot depreciate the portion of their homes used in a trade or business, but they can claim allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions. The deductions do not need to be allocated between personal and business use, as is required under the current method.

Important: The new option does not change the current restrictions on home office write-offs, such as requirements that a home office must be used “regularly and exclusively” for business and that the deduction is limited to the income derived from a particular business.

A taxpayer can elect from taxable year to taxable year whether to use the new method or to calculate and substantiate actual home office expenses. An election for any taxable year, once made, is irrevocable. “A change from using the new method in one year to actual expenses in a succeeding taxable year, or vice-versa, is not a change in method of accounting” and does not require IRS consent, according to the new Revenue Procedure.

The new option will “reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually,” the IRS stated.

In tax year 2010, the most recent year for which figures are available, nearly 3.4 million taxpayers claimed deductions for the business use of a home.

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– content reprinted with permission from BKR International.

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