New Safe Harbor Offers Simplified Home Office Deduction

Adam Aucoin, Tax Manager
September 2013

Effective for tax years beginning on or after January 1, 2013, individuals eligible for the home office deduction may now use a simplified safe harbor method to calculate the amount of the deduction. The new safe harbor method is calculated by multiplying $5 by the square footage (up to 300 square feet) of the home office. The maximum home office deduction under the safe harbor method, therefore, is $1,500 (300 square feet multiplied by $5).

To use the safe harbor method the taxyaper must meet the general qualifications of the home office deduction. To qualify, the home office must be used exclusively and on a regular basis:

  1. as the principal place of business for any trade or business of the taxpayer,
  2. as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or
  3. in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer’s trade or business.

If the individual is an employee, the home office must be used for the convenience of the employer. Note that the safe harbor method does not apply if the employee receives advances, allowances, or reimbursements for expenses related to the qualified business use of the employee’s home.

The safe harbor method is a new alternative to the actual-expense method of calculating the home office deduction. The actual-expense method allocates expenses incurred based on either (1) the square footage of the office in relation to the square footage of the house, or (2) if all rooms are of a similar size, by dividing the number of rooms used for business by the total number of rooms in the house. Examples of typical expenses used in the actual-expense calculation include real estate taxes, mortgage interest paid, home insurance, utilities, and repairs.

Both methods are subject to an income limitation. The home office deduction cannot exceed gross business income reduced by business deductions unrelated to the qualified business use of a home (in other words, this deduction cannot be used to produce a loss). Under the actual-expense method any excess deduction not allowable for the current tax year can be carried forward to later years; however, the safe harbor method does not allow for excess home office deduction to be carried forward, or for prior years’ losses to be utilized in a year the safe harbor method is employed.  Each year, a taxpayer can choose which method will apply for that year’s tax return.

The safe harbor method differs from the actual-expense method in the following additional ways:

  1. Depreciation is not allowed for years in which the safe harbor method is elected. As a result, when the home is sold, no depreciation recapture is required for the years in which the safe harbor method was elected.
  2. Taxpayers who elect to use the safe harbor method may deduct to the fullest extent allowable itemized deductions on Schedule A, e.g. real estate taxes and mortgage interest. The actual-expense method allocates those items between the home office deduction on Form 8829 and Schedule A.

As more people work from home on a regular basis, the home office deduction becomes more meaningful to many more taxpayers, particularly given the new safe harbor method. In the past, taxpayers who qualified for the home office deduction may have been hesitant to take advantage of it because of the recordkeeping, time, and other compliance burdens involved. The new safe harbor method eliminates those burdens by simplifying the calculation. The same eligibility exists with the new safe harbor method, but the complexity of the deduction is greatly reduced and should be considered by anyone with a qualifying home office.

If you would like to discuss further, please call your BNN advisor at 1.800.244.7444.

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