Business Use of the Home: New Option for 2013

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Many self-employed taxpayers work from home.  But not all of them can deduct expenses for the “business use of their home.”  The tax worksheet (Form 8829) may be only one page long, but it’s 43 lines of mind-numbing detail (at least for one more year) that you are better off skipping if you see that you don’t meet the threshhold requirements.

In order to qualify for the “business use of the home” deduction, there must be a section (or sections) of your home which you use exclusively and regularly as your principle place of business.  The deduction amount is based on square footage dedicated to this purpose. Therefore, no matter how often you find yourself on your laptop in that 3′ x 3′ area of your mancave occupied by the Lazyboy, if you ocassionally flip on the TV from that same spot, or host superbowl parties or such, you cannot satisfy the “exclusivity” prong of the test.

The good news is the IRS recently announced a new simplified option for “business use of the home” that will apply to 2013 taxes (during the 2014 filing season).  Taxpayers will be able to opt for a straight $5.00 per square food deduction (capped at $1,500 per year) instead of stressing over dreaded Form 8829.  It is believed that more taxapayers will take advantage of the tax relief afforded by this deduction and will save taxpayers something like 1.6 million hours of work and recordkeeping annually.  However, the basic exclusivity requirments explained above will remain in place.

Abel Maldonado’s Tax Controversy

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In California, Abel Maldonado is a familiar name.  He’s the former lieutenant governor and he’s currently running for Senate in the new Central Coast district.  Maldonado is also in the news because of his serious tax problems.

As far as the IRS is concerned, one of the worst things a business owner can do is make personal expenditures out of the business funds and try to write them off as legitimate business expenses.  The only reason anyone would attempt this is to make it appear that the income is lower because, if the income is lower, the tax bill is also lower.

This is at the center of the controversy between the Maldonado family farming business (Agro-Jal) and the Internal Revenue Service.  The IRS has billed them for $3.6 million and Maldonado refuses to pay.  These are some of the expenditures that the government contends had no legitimate business purpose:

  1. renovations to Maldonado’s residences
  2. fundraiser for his campaign for Senate
  3. unspecified catering expenses
  4. personal use of company vehicles
  5. golf club memberships
  6. horses

This certainly does not good for Maldonado’s campaign, even if he has legitimate arguments in tax court — it’s the perception that counts.  But maybe the IRS should give them the horses; seems like a farming expense to me!

IRS Updates Standard Expense Amounts

If you incur a tax debt and are unable to pay back what you owe in one lump sum, you may need to disclose your financial information to the IRS to prove how much you can afford to pay on a monthly basis.  The same thing applies to the Offer in Compromise program.  Under no circumstances will the IRS agree to a settlement of your tax debt without first reviewing your financials in detail.  If you hire a tax attorney, he/she will present your financials in a light most favorable to you, the taxpayer, and will argue the finer points to help you get the best result possible.

What sort of financial information does the IRS request?  In the most general sense, they want to know about your income, expenses, and assets.  However, the questions often depend on the individual circumstances of each case: the amount owed, the type of resolution sought, the closeness of the Collection Statute Expiration Date, etc.  Sometimes the questions can be quite invasive.  But for some expenses, the IRS allows a set amount without questioning the actual amount spent by the taxpayer.  These are referred to as the “National Standards.”

The National Standards include an allotment for each of the following expense categories:

  • Food
  • Housekeeping supplies
  • Apparel & services
  • Personal care products & services
  • Miscellaneous

The current National Standard amount for all 5 categories combined is $565 for a household of one.  For purposes of determining how much you can pay under an Offer in Compromise or an Installment Agreement, the IRS will allow this full amount, even if you spend far less in reality.  The IRS allows $1,029 for a household of 2; $1,227 for 3; $1,450 for 4, and another $281 for each additional person beyond 4.  These are the new amounts based on updates done April 27, 2012 and effective retroactively from April 2, 2012.

The previous National Standard amount for a household of 1 was $534.  The National Standard amounts are based on data from the Bureau of Labor Statistics and are typically updated no more than once a year.