The Internal Revenue Service plans to introduce a simplified way for small business owners and home-based employees to claim the home office tax deduction.
Karen Mills
Small business owners and employees who work from home and who maintain a qualifying home office will be able to deduct up to $1,500 per year. The new option allows qualified taxpayers to deduct annually $5 per square foot of home office space on up to 300 square feet, for as much as $1,500 in deductions. To take advantage of the new option, taxpayers will complete a much simpler version of the current 43-line form.
The new simplified option will be available starting with the 2013 return that most taxpayers file early in 2014.
The IRS anticipates taxpayers will be able to save more than 1.6 million hours per year in tax preparation time from this simpler calculation method. The effort was described by Deputy Treasury Secretary Neal S. Wolin and SBA Administrator Karen Mills as part of the ongoing efforts by the Obama administration to reduce paperwork burdens.
“The announcement builds on the President’s commitment to streamline and simplify the tax code for small businesses and to reduce the burden for tax compliance,” they wrote. “It is part of broader efforts to make interacting with the federal government easier and more efficient for businesses of all sizes.”
The new option for the home office deduction will be available starting with the tax year 2013 return, according to Mills and Wolin, which most taxpayers file early in 2014. In addition, the IRS is accepting comments for improving upon this new option.
Current restrictions on claiming the home office deduction, such as the requirement that a home office be used regularly and exclusively for business and the limit on the amount of the deduction tied to income derived from the particular business, will still apply under the new option.
The new option provides eligible taxpayers an easier path to claiming the home office deduction. Instead of filling out the 43-line Form 8829, which often entails complex calculations of allocated expenses, depreciation and carryovers of unused deductions, taxpayers can claim the optional deduction through a significantly simplified form.
"This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction," said Acting IRS Commissioner Steven T. Miller in a statement. "The IRS continues to look for similar ways to combat complexity and encourages people to look at this option as they consider tax planning in 2013."
While homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions do not need to be allocated between personal and business use, as is required under the traditional method.
Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees, are still fully deductible, the IRS noted.
Further details on the new option can be found in Revenue Procedure 2013-13, posted Tuesday on IRS.gov. Revenue Procedure 2013-13 is effective for taxable years beginning on or after January 1, 2013, and the IRS welcomes public comment on this new option to improve it for tax year 2014 and later years. There are three ways to submit comments.
• E-mail to: Notice.Comments@irscounsel.treas.gov. Include “Rev. Proc. 2013-13” in the subject line.
• Mail to: Internal Revenue Service, CC:PA:LPD:PR (Rev. Proc. 2013-13), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.
• Hand deliver to: CC:PA:LPD:PR (Rev. Proc. 2013-13), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC, between 8 a.m. and 4 p.m., Monday through Friday.
The deadline for comment is April 15, 2013.
9 Comments
IRC which governs the home office deduction clearly states that depreciation of the home is a part of the calculation.
If depreciation is no longer included, what happens to "depreciation allowed or ALLOWABLE" when figuring recapture of depreciation on the sale of a home where the home office deduction has been taken?
How about a home office depreciated on Form 8829 for several years, then switched to the new style of computation? Do we go back and count up the depreciation "allowable" only on 8829 years, even if not taken?
For this to work equally for all taxpayers, "depreciation ALLOWABLE" (but not taken) must be forgiven on ALL prior year tax forms. This will require Congressional legislation.
Does anyone actually think these things through, or are they just thrown out there for the media? (Like the ill-fated 1099-K?)
Kate Harner, EA
Posted by: KATEHARNER | January 16, 2013 11:04 PM
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I think 1,2, and 4 have got this spot on. This method should only be optional
Posted by: kmkevinmack1 | January 16, 2013 7:05 PM
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It says "up to" 300 Sq Ft office will produce $1500 home office deduction. I haven't seen any of the people I help with a home office that large. A 10 x 12 office area in a 1500 SF home/apt. would only produce a $600 deduction by the new way. 8% of mortgage interest/taxes or rent (say $900/mo), plus utilities & insurance (say $200/mo), would produce a deduction of $1056. A good deal for the IRS, but not many taxpayers. This method new method of calculation should be an option, not the only way.
Posted by: rmclane | January 16, 2013 5:29 PM
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This rule will cause business's that use a lot of space and have workers come to the home to take a substantial cut in their deductions. I would bet that more companies rent outside offices and move themselves to a smaller house or apt. This can be real bad on the bottom line which means more income and self employment tax. I specifically know someone that rents a large apt for himself and his business. He uses 2 rooms out of 4, pays $3000 rent, $2500 utilities, $750 for insurance and ge gets a $1500 deduction. That is absurd.his apartment is used by himself, employees, storing inventory, having clients visit to pick out what they want to order. By the way he was forced to sign a three year lease and he only did that because of the existing rules then and it would have cot him more to rent an office ang get a place to live.
This should not be mandatory for everyone.
Posted by: Jbhardi | January 16, 2013 2:29 PM
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Good Idea!
Except any deductions moved to Schedule A will increase the self-employment taxes from Schedule C. Then there is the question will this help if the taxpayer doesn't have enough deductions to use the Schedule A?
Still, a move in the right direction.
Steven R. Hughes, RTRP Albuquerque
Posted by: FINANCEXPR | January 16, 2013 11:19 AM
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I hope allocable property tax and mortgage interest are added on top of the $1,500 or taxpayers will overpay and the IRS calls it simplification.
Posted by: timsmith | January 16, 2013 10:43 AM
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I assume that all the other rules about home-office deductions still apply. e.g., a taxpayer must have positive net income from self-employment in order to take this simplified deduction. That is currently the rule for the home-office deduction using form 8829.
Posted by: janejohn | January 16, 2013 10:38 AM
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It is the good news. Small businesses will have additional stimulation to show their taxable income honestly, without evasion. The new option is acceptable to make it faster that it was before:"The new option provides eligible taxpayers an easier path to claiming the home office deduction... Taxpayers can claim the optional deduction through a significantly simplified form."
Posted by: nadezdamindyuk | January 16, 2013 8:09 AM
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Bout time!!!
Posted by: DJBradach | January 16, 2013 7:29 AM
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