The IRS released a proclamation in January of 2013 that will give taxpayers an option to simplify the home office deduction. The proclamation does not change any of the criteria to qualify for this deduction.
The new safe harbor method will allow taxpayers to take a deduction calculated by multiplying the sq. footage used in qualified business use by $5; the maximum sq. footage allowed is 300, limiting the deduction to $1,500. The $5 allowance is not subject to inflation, but may be revisited from time to time by the IRS. Because the $1,500 is a safe harbor, business owners will not be able to deduct actual expenses related to qualified business use of home. The safe harbor deduction is still subject to gross income limitation tests, but unlike the actual expense method any unused portion will not carryover to the next year.
Another limitation with using the safe harbor method is that it is irrevocable for the years elected. You elect to use the safe harbor on a timely filed original tax return, and you can change your treatment from year to year. A benefit for the safe harbor is that when it is elected, you cannot deduct depreciation for the space, so a taxpayer can avoid depreciation recapture upon sale of the residence and still take a business us of home deduction.
An additional benefit to the safe harbor is that a taxpayer who uses safe harbor and itemizes in a tax year, can deduct any expenses related to the home such as property taxes and mortgage interest, without regard to business use, on Sch A, to the extent allowable for itemized deductions.
One last thing to note, spouses or roommates using the same space for business use may not both take the safe harbor deduction.
Using the safe harbor deduction could eliminate some of the hassle of record keeping, because it is based on sq. footage versus actual expenses and make tax time a little less taxing for business owners.
If you have any questions about how this may affect you, or which deduction would be better for you, please consult your tax preparer.
To read a previous article about qualifying for the home office deduction click here.