SECTION 2. BACKGROUND

.01 Section 280A(a) generally disallows any deduction for expenses related to a dwelling unit that is used as a residence by the taxpayer during the taxable year. However, § 280A(c)(1) through (4) allow a deduction for expenses related to certain business or rental use of a dwelling unit, subject to the deduction limitation in § 280A(c)(5).

.02 Section 280A(c)(1) permits a taxpayer to deduct expenses that are allocable to a portion of the dwelling unit that is exclusively used on a regular basis (A) as the taxpayer’s principal place of business for any trade or business, (B) as a place to meet with the taxpayer’s patients, clients,

for payments made to mortgage servicers under the EHLP.

APPLICATION

Income Tax Consequences to Homeowners

For taxable years 2010 through 2015, a homeowner may deduct on his or her Federal income tax return the lesser of—

mortgage that the homeowner actually makes during a taxable year to the mortgage servicer, HUD, or the State HFA; and

1098 for mortgage interest received, real property taxes, and (for years 2010 through 2013 only) mortgage insurance premiums. (For Forms 1098 issued for 2010 and 2011, mortgage servicers report these amounts in Box 4 (Mortgage insurance premiums). On Form 1098 for 2012, Box 4 is unlabeled, but, pursuant to instructions, mortgage servicers should again report these amounts in Box 4.)

This safe harbor method of computing the homeowner’s deduction applies for a taxable year if (1) the homeowner meets the requirements of §§ 163 and 164 to deduct all of the mortgage interest on the loan and all of the real property taxes on the principal residence, and (2) the homeowner participates in a State Program in which the program payments could be used to pay interest on the home mortgage, or the EHLP or an SSSP.

Information Reporting Obligations

The Service will not assert penalties under §§ 6721 and 6722 against a mortgage servicer that reports on Forms 1098 payments received under a State Program, the EHLP, or an SSSP during calendar years 2011 through 2015 if the servicer notifies homeowners that the amounts reported on the Form 1098 are overstated because they include government subsidy payments.

The Service will not assert penalties under §§ 6721 and 6722 against any State HFA for failing to file and furnish Forms 1098 for calendar years 2011 through 2015 if the State HFA provides each homeowner and the IRS a statement setting forth (1) the homeowner’s name and TIN, and (2)

the amount of payments the State HFA made to the mortgage servicer under the State Program or the SSSP during that year (separately stating the amount the State HFA paid and the amount the homeowner paid). Except as provided in Rev. Proc. 2011–55 regarding use of Form 1098–MA, the statement the State HFA provides to the IRS must be a single statement that separately lists the names, TINs, and relevant payment amounts for each homeowner.

In addition, for calendar years 2011 through 2015, HUD should provide each homeowner and the IRS a statement setting forth (1) the homeowner’s name and TIN, and (2) the amount of payments HUD made to the mortgage servicer under the EHLP during that year (separately stating the amount HUD paid and the amount the homeowner paid). Except as provided in Rev. Proc. 2011–55, the statement HUD provides to the IRS should be a single statement that separately lists the names, TINs, and relevant payment amounts for each homeowner.

For calendar years 2011 through 2015, State HFAs and HUD may, at their option, use Form 1098–MA in accordance with Rev. Proc. 2011–55 to provide the information described in Notice 2011–14 instead of filing a single statement for the calendar year.

State Programs

The State Programs to which Notice 2011–14, Rev. Proc. 2011–55, and this notice apply are listed at www.treasury.gov/HHF . This list includes all of the State Programs that appeared in the Appendix to Notice 2011–14 as well as any additional programs that the Treasury Department has approved for funding from the HFA Hardest Hit Fund.

EFFECT ON OTHER DOCUMENTS

(1) Notice 2011–14 is amplified by extending the guidance relating to (a) the safe harbor method for computing a homeowner’s deduction for payments made on a home mortgage through the taxable year 2015, and (b) information reporting for those payments through the calendar year 2015. Notice 2011–14 also is amplified by revising the safe harbor method for computing a homeowner’s deduction to include mortgage insurance premiums paid or accrued for years 2012 and 2013.

February 4, 2013 478 2013–6 I.R.B.

(4) This safe harbor method is an alternative to the calculation and allocation of actual expenses otherwise required by § 280A. Accordingly, except as provided in section 4.04 of this revenue procedure, a taxpayer electing the safe harbor method for a taxable year cannot deduct any actual expenses related to the qualified business use of that home for that taxable year.

.02 Reimbursement or other expense al- lowance arrangement . The safe harbor method provided by this revenue procedure does not apply to an employee with a home office if the employee receives advances, allowances, or reimbursements for expenses related to the qualified business use of the employee’s home under a reimbursement or other expense allowance arrangement (as defined in § 1.62–2) with his or her employer.

.03 Year-by-year determination. A taxpayer may elect from taxable year to taxable year whether to use the safe harbor method or to calculate and substantiate actual expenses for purposes of § 280A. A taxpayer elects the safe harbor method by using the method to compute the deduction for the qualified business use of a home on his or her timely filed, original federal income tax return for the taxable year. An election for any taxable year, once made, is irrevocable. A change from using the safe harbor 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 the consent of the Commissioner.

.04 Otherwise allowable deductions re- lated to the home . A taxpayer who itemizes deductions and uses the safe harbor method for a taxable year may deduct, to the extent allowed by the Code and regulations, any expense related to the home that is deductible without regard to whether there is a qualified business use of the home for that taxable year (for example, deductions for qualified residence interest, property taxes, and casualty losses). Taxpayers using the safe harbor method deduct these expenses as itemized deductions on Form 1040, Schedule A, and cannot deduct any portion of these expenses from the gross income derived from the qualified business use of the home, either for purposes of determining the net income derived from the business or for purposes of determining the gross income limitation provided in section 4.08(2) of this rev

or customers in the normal course of the taxpayer’s trade or business, or (C) in the case of a separate structure that is not attached to the dwelling unit, in connection with the taxpayer’s trade or business.

.03 Section 280A(c)(2) permits a taxpayer to deduct expenses that are allocable to space within the dwelling unit used on a regular basis for the storage of inventory or product samples held for use in the taxpayer’s trade or business of selling products at retail or wholesale, if the dwelling unit is the sole fixed location of the trade or business.

.04 Section 280A(c)(3) permits a taxpayer to deduct expenses that are attributable to the rental of the dwelling unit or a portion of the dwelling unit.

.05 Section 280A(c)(4) permits a taxpayer to deduct expenses that are allocable to the portion of the dwelling unit used on a regular basis in the taxpayer’s trade or business of providing day care for children, for individuals who have attained age 65, or for individuals who are physically or mentally incapable of caring for themselves.

.06 Section 280A(c)(5) limits the deductibility of expenses that relate to a use of a dwelling unit described in § 280A(c)(1) through (4) to the gross income derived from that use for the taxable year reduced by (1) the deductions allocable to the use that are allowable for the taxable year whether or not the unit is used as described in § 280A(c)(1) through (4) (for example, deductions for qualified residence interest, property taxes, and casualty losses); and (2) the allowable trade or business expenses that are not allocable to the use of the dwelling unit for the taxable year (for example, advertising, wages, and supplies).

.07 The Internal Revenue Service (Service) and the Treasury Department recognize that the calculation, allocation, and substantiation of allowable deductions attributable to the use of a portion of the taxpayer’s residence for business purposes can be complex and burdensome for small business owners. Accordingly, the Service and the Treasury Department are providing this optional safe harbor method to reduce the administrative, recordkeeping, and compliance burdens of determining the allowable deduction for certain business use of a residence under § 280A. Under this safe harbor method, taxpayers de

termine their allowable deduction for business use of a residence by multiplying a prescribed rate by the square footage of the portion of the taxpayer’s residence that is used for business purposes.