Your Home Office is Safe with the IRS

In an attempt to reduce the administrative, recordkeeping, and compliance burdens of taxpayers, the IRS has offered a safe harbor method to compute the allowable deduction for the business-use portion of the home. The safe harbor method is effective for taxable years beginning on or after January 1, 2013. 

Under the safe harbor method, the taxpayer multiplies the allowable square footage of the home office by the prescribed rate of $5.00. The allowable square footage for business use cannot exceed 300 square feet; thus, the maximum allowable home office deduction under the safe harbor method is $1,500. The safe harbor deduction, cannot exceed the business income for the year reduced by business expenses unrelated to the dwelling unit. Any taxpayer using the safe harbor method may not carry over any disallowed safe harbor deductions to the next year.

Other Provisions

• The safe harbor method does not apply to any employee with a home office who receives advances, allowances, or reimbursements for expenses related to the business use of a home.
  
• Taxpayers may switch from the safe harbor method to actual expenses from year to year as many times as they wish.
• Taxpayers using the safe harbor method may deduct 100% of mortgage interest and real estate taxes on Schedule A, Itemized Deductions. However, if there is a rental portion, the taxpayer must allocate those expenses between Schedule E and Schedule A.
• When claiming actual expenses following a year for which the safe harbor method was used, multiply the remaining adjustable depreciable basis times the business- use percentage times the annual depreciation rate for the applicable year specified in the appropriate optional depreciation table.
• The calculation is based on whole business months. If business use begins during the year, a taxpayer takes the square footage times the number of business use months (minimum of 15 or more business days) divided by 12.
• Taxpayers sharing a home may each use the safe harbor method, but the same area (square footage) cannot be used twice.
• A taxpayer with qualified business use of more than one home for a taxable year may use the safe harbor method for only one home for that taxable year. The taxpayer may use actual expenses, if eligible, for the other home.
• A taxpayer using the same home office for more than one business must use the safe harbor method for each qualified business using that space if electing the safe harbor method. The taxpayer is limited to a maximum of 300 square feet. The taxpayer must allocate the square footage between the businesses in any reasonable manner.