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Simplified Option for Claiming Home Office Deduction

The IRS is providing an optional safe harbor method that individuals can use to determine the amount of their deductible home office expenses, effective for tax years beginning on or after January 1, 2013. The safe harbor, $5 × square feet of qualified use (up to 300 square feet), provides an alternative to the calculation, allocation, and substantiation of actual expenses.

Background

The general rule is that no deduction is allowed for the business use of a dwelling unit that's also used by the taxpayer as a residence during the tax year. But under exceptions, if strict requirements are met, deductions are allowed for direct expenses and the business-use part of the indirect expenses relating to business use of a residence:

These deductions are limited to the activity's gross income reduced by all other deductible expenses that are allowable regardless of qualified use (e.g., mortgage interest, real estate taxes, and casualty losses) and by the business deductions that aren't allocable to the use of the home itself (e.g., expenses of advertising, wages, and supplies). Expenses disallowed solely because they exceed business income can be carried forward, subject to the gross income limitation in the later year.

New safe harbor

To reduce the administrative, recordkeeping, and compliance burdens of determining the allowable deduction for the qualified business use of a residence, the IRS is providing a safe harbor method under which an individual determines his allowable deduction for the qualified business use of a home by multiplying a prescribed rate ($5) by the square footage of the part of this residence that is used for business purposes, not to exceed 300 square feet.

"Qualified business use" for this purpose is a business use that satisfies the requirements outlined above; that is, uses for which a deduction would otherwise be allowed. The $5 rate may be updated from time to time, as warranted. Adjustments are provided for determining the allowable square footage for a taxpayer with a qualified business use of a home for only a part of a year.

Observation: Thus, the maximum deduction under the safe harbor is limited to $1,500 ($5 rate × 300 square feet).

For purposes of the safe harbor, "home" means a dwelling unit used by the taxpayer during the tax year as a residence, including a dwelling unit leased by a taxpayer. The safe harbor method doesn't apply to an employee with a home office if he or she 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 with his employer.

The safe harbor is an alternative to deducting actual expenses. Accordingly, a taxpayer electing the safe harbor method for a tax year generally can't deduct any actual expenses related to the qualified business use of that home for that tax year, with the following exceptions:

Otherwise allowable home-related deductions.

A taxpayer who itemizes deductions and uses the safe harbor may deduct any allowable expenses related to the home that are deductible without regard to whether there was a qualified business use of the home for that tax year (e.g., 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 part 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. Taxpayers with a qualified business use of a home who also have a rental use of the same home must allocate a portion of these expenses to the rental use to the extent required.

Business deductions unrelated to qualified home use.

A taxpayer using the safe harbor method for a tax year may deduct any allowable trade or business expenses unrelated to the qualified business use of the home for that tax year (e.g., expenses for advertising, wages, and supplies).

A taxpayer using the safe harbor for a tax year can't deduct any depreciation (including first-year bonus depreciation) or Code Sec. 179 expensing for the part of his home that is used in a qualified business use for that tax year. If he or she calculates and substantiates actual expenses for a later year, he or she must calculate the depreciation deduction by using the appropriate optional depreciation table applicable for the property, regardless of whether he or she used an optional depreciation table for the property in its placed-in-service year.

A taxpayer using the safe harbor method for a tax year can't deduct any disallowed amount carried over from a prior tax year during which the taxpayer calculated and substantiated actual expenses. He can deduct the carried-over amount in the next succeeding tax year in which he calculates and substantiates actual expenses.

Electing the safe harbor.

A taxpayer may elect from tax year to tax year whether to use the safe harbor method or calculate and substantiate actual expenses. A taxpayer elects the safe harbor by using the method to compute the deduction for the qualified business use of a home on his timely filed, original federal income tax return for the tax year. Once made, an election for the tax year is irrevocable. A change from using the safe harbor method in one year to actual expenses in a succeeding tax year (or vice-versa) isn't a change in accounting methods.

Posted: January 19, 2013

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