New Safe Harbor for Deductions Related to Business Use of Residence

Section 280A generally disallows deductions for business expenses with respect to a dwelling unit used by a taxpayer as a residence.  However, if the conditions of Section 280A(c) are met (such as establishing a qualified business or rental use), then the taxpayer may take deductions up to the amount of gross income derived from the qualified use for the taxable year reduced by the sum of the deductions allocable to the use that are allowable outside of Section 280A and the allowable trade or business expenses that are not allocable to the use of the dwelling unit for the taxable year.  Section 280A imposes strict requirements on a taxpayer to calculate, allocate, and substantiate actual expenses related to business use of a residence, in order to be entitled  to offset such deductions against income.  Recently, the IRS released Rev. Proc. 2013-13  which allows a taxpayer with a qualified home office to determine the amount of deductible expenses by multiplying the allowable square footage of the home office, up to 300 square feet, by a prescribed rate, which is currently set at $5.   While the prescribed rate set forth in Rev. Proc. 2013-13  is not indexed for inflation, it may be changed by the Treasury at any time.   Under the current prescribed rate, the maximum safe harbor deduction under Rev. Proc. 2013-13 is $1500, however such deduction is still limited to the gross income derived from the home office for the taxable year reduced by other business deductions referenced above.  A taxpayer who elects to use the safe harbor may not deduct any actual expenses related to the qualified business use of the home for that year.

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