Simplified Safe Harbor Deduction Method for Home Offices

To help with the historically difficult and confusing method used by home-based business owners and home-based employees to record and determine home office deductions, the IRS recently announced a simplified safe harbor deduction calculation method. According to the IRS, this new method will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.

Individuals who elect the safe harbor method can deduct up to $1,500 annually. The actual deduction amount is calculated by taking the total square feet of the portion of the home utilized for business purposes (up to 300 feet) and multiplying by $5.

Electing the safe harbor is done on a timely filed original tax return (instead of Form 8829, Expenses for Business Use of Your Home, which is used for the actual-expense method) and taxpayers are allowed to change their deduction method from year-to-year. However, the election made for any tax year is irrevocable.

If you currently utilize a portion of your home for business purposes you may want to opt for the safe harbor method if:

  • Your recordkeeping isn’t great and you struggle to calculate and verify your actual expenses.
  • You are looking for a simpler way to claim the deduction without keeping extensive records.
  • You are planning to sell your home. (Under the safe harbor, there is no need to be concerned with deprecation recapture upon the sale of the home.)
  • You are renting your residence or you have low housing expenses.
  • You have a small amount of interest and real estate tax expense moved from pre-Adjusted Gross Income (AGI) to Schedule A.

The safe harbor method may not be the best method for you if:

  • You have prior excess deductions that are carrying forward and could be used in the current year.
  • Your annual business home expenses tend to exceed the net income of the business.
  • You use more than 300 square feet of your home for business purposes.
  • Your costs for using your home for business purposes are more than $5 per square foot (not including taxes, interest, and depreciation).
  • There is no benefit for business percent of interest and taxes on Schedule A.

It is important to note that the safe harbor does not change the eligibility criteria for claiming a home office deduction. In addition, unlike the actual-expense method, the safe harbor method does not allow a carry-over of any excess deductions for future tax years.

The optional safe harbor deduction is effective for tax years beginning on or after January 1, 2013. For additional details, please review Revenue Procedure 2013-13. As always, our team of professionals is here to help on this as well as other tax issues. Should you have any questions, please give our office a call at (402) 423-4343.

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