Has the Business Use of Home Tax Credit Changed for 2013?

Has the Business Use of Home Tax Credit Changed for 2013?

Home Use of Office

By Tim Frye

Change is part of life, and the tax code is definitely no different.  In fact the code seems to require more upkeep and see more change to its parts than a jaguar on its last leg.  For 2013 one of the major changes to the tax deduction portion of the code is the alteration made to the popular business use of home deduction available to those self-employed taxpayers who use a home office as their principal place of business.  It enables the small business owner to essentially write off a portion of the home’s expense as a business deduction.  In 2013 the credit has been simplified but has seen significant change.  Let’s discuss the new attributes of the Business Use of Home Deduction.

What is the IRS Business Use of Home Credit?

When self-employed taxpayers work from home and their home office is their main office, they may be eligible for the Business Use of Home Deduction.  In order to qualify for the deduction, the home office must be “exclusively and regularly used as the taxpayer’s principal place of business.”  The taxpayer must conduct the majority of their business from this home office in order to be able to access the write off. 

In 2010, it is estimated that 3.4 Million taxpayers claimed the Business use of home deduction.  It is vital to note that because of both its abuse and overuse, the deduction can be a red flag for an IRS audit, so accurately recording of home office business expenses is paramount. 

How is the Business Use of Home Deduction Calculated for 2012?

When calculating the business use of home credit, it is helpful to first look at what home expenses are eligible to be deducted.  On the Business Use of Home Deduction Form 8829, eligible expenses are delineated into the categories of either Direct or Indirect Expenses. Examples of direct expenses would be the business costs that are in direct relation to the home office, such as paint for the office.  This expense could be deducted in its entirety against self-employment income.  Indirect Expenses would be things like mortgage interest or property tax.  These are classified as indirect business expenses because they pay for ENTIRE upkeep of the home. 

So the calculation for the Business Use of home goes as follows.  If an expense is direct, it goes direct against self-employment income on the Schedule C and assists the taxpayer to eat away at both the federal and self-employment tax.  If the expense is classified as indirect, the taxpayer can deduct the percentage of the expense that is related to the business portion of the home.   For example if the taxpayer uses 20% of the home for qualifying business purposes, and they have an indirect mortgage expense of $10,000, the exact write off is $2,000.  Taxpayers can also choose the auxiliary calculation method of taking the square foot of the office and dividing it by the total square footage of the household.  Either way ends in the same result.  The percentage of the home used for exclusive business purposes. 

How has the Business Use of Home Credit Changed for 2013?

In 2013 the IRS essentially tried to simplify the nuances of the Business use of Home deduction.  There is a new optional method of calculating the self-employed taxpayer’s home office expense for this tax year.  Instead of having to complete the forty-three lines that are contained within this deductions tax Form 8829, taxpayers are now permitted to use a more compact method of deducting $5 per square foot of the designated home office, and the maximum square footage allowed on home office is 300 square feet.  So the deduction caps at $1,500.  It is important to note that if the taxpayer chooses to employ this method they cannot then depreciate and real estate expenses that year.  Taxpayers are permitted to bounce back and use the Form 8829 the following year if they feel like it. 

Remember that this deduction is not now just an automatic deduction given to any self-employed taxpayer who occasionally works out of his or her home.  All of the previous IRS provisions and regulations in regards to the Business use of home deduction still apply.  Compared to the previous amounts that the deductions produced, this new optional method doesn’t seem too great on its face. 

Since most tax software produces a rather simple result regardless of the method the person uses, it would seem to make sense to use the Form 8829 to gain access to the larger deduction.  Generally, all the taxpayer needs to do is enter the appropriate information in the correct boxes, such as rent or mortgage interest, property taxes, utilities, and insurance etc. The business allocations are then made by the tax program without the person having to fill out every single line of the 43. 

One of the huge advantages of the self-employed home owner who elects to use the old Form 8829 to report home office expense is that they are paying less self-employment tax.  With the new option, all of the mortgage interest and indirect office expenses have to go on the Schedule A as an itemized deduction.  There is no extra business expenses to eat away further at that extra 15.3% self-employment tax.  With Form 8829 the taxpayer has more to write off against the bigger tax rate.

The new optional method allows a deduction in its entirety for things such as mortgage interest and property taxes on the Schedule A.  The taxpayer can then still deduct the additional optional method amount on Schedule C.  

One additional benefit of choosing the new option is that the taxpayer is much less likely to be audited.  With Form 8829, the IRS will automatically wave the red flag.  The new option essentially doesn’t require the taxpayer to list their so called eligible expenses.  So the IRS has a narrower audit bandwidth to work with.  And when that happens, the taxpayer always wins.  

In conclusion the credits options should probably be measured together by the taxpayer, to see which one provides the most benefit.  The new option can sometimes pay out a larger sum due to the taxpayer being able to write off full mortgage interest on the Schedule A and still claim the additional home office deduction. 

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