Optional Safe Harbor Method for Determining the Home Office Deduction

Home Office Deduction - Delaware Accounting FirmIn 2013, the Internal Revenue Service (IRS) provided an alternate way to calculate the Home Office Deduction called the Optional Safe Harbor Method in Rev. Proc. 2013-13. This simplified method is ideal for those who do not have adequate records of home expenses, do not wish to depreciate their home, or are renters. Under this method the “qualified business use test” still must be met but instead of reporting actual expenses, a set amount can be taken. The set amount is $5 per square foot for up to 300 square feet, which allows for a maximum of a $1,500 home office deduction. For example, if you have a small office in your home that is 8 feet by 8 feet, you can deduct $320 (8 X 8 X $5) for the Safe Harbor Method of the Home Office Deduction.

Some Highlights

  • The election is made by completing line 30 of Schedule C on a timely filed return.
  • The election can be made year-to-year but once the election is made, it’s irrevocable for that tax year.
  • It cannot be used if you receive advances or reimbursements of expenses from your employer.
  • You can still take Schedule A deductions such as the home mortgage interest and real estate tax deductions.
  • The amount of the deduction cannot exceed the gross income derived from the business and any excess cannot be carried over to the next year.
  • Prior year carryovers using the actual expense method cannot be taken but may be used in a future year (when the actual expense method is used).
  • You cannot also take a deduction for depreciation for the home. The depreciation amount for the year will be ZERO. If actual expense method is used in a later year, the depreciation allowable for the business portion of the home is calculated using the annual depreciation rate for the applicable year that corresponds with the placed-in-service year of the property. (See your tax professional for more info.)
  • If you are using the space for more than one business, the space should be allocated among the businesses.
  • If you have more than one home, the deduction can only be taken once in a given year.

As always, please contact your tax professional regarding any of the information highlighted above.

Have Questions?

For additional information regarding home businesses and tax planning, visit our website or contact our small business advisory team. Photo by Erik Eckel (License)

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