Ever since the inception of the Internet, home offices have been growing by leaps and bounds; by one estimate more than three million taxpayers can make that claim. While there are any number of benefits to having a home office, one irksome negative was the burden involved in substantiating the home office deduction and the Internal Revenue Service’s complicated and convoluted process to file that claim.
Well, it seems someone at the IRS has become enlightened and the long awaited simplifications to the various rules which govern home office deductibles have now been released. Like the cumbersome 1040’s simplified counterpart the 1040-EZ – this then could be considered the EZ option for home office deductions.
Under the terms of Rev. Proc 2013-13, which the IRS calls the “safe harbor” method and beginning with this tax year, i.e. as of January 1, 2013, taxpayers will be able to easily calculate their 2013 deduction for their home office; just multiply the square footage of the area of your home that you use strictly for business purposes by the prescribed rate ($5 per square foot) and Voila! You have your tax deduction.
Three Rules for Claiming the Safe Haven Home Office Deduction
According to the IRS Code 280A, home office usage is defined as:
- A home office is considered the taxpayer’s primary place in which he or she conducts trade or business.
- The home office may or not be attached to the taxpayer’s residence; it may be a separate structure on the property used exclusively as a home office.
- A home office is where the taxpayer will meet clients, customers or patients during the normal course of business.
Of course, even under the simplified method it is the taxpayers’ responsibility to ensure that good records which prove the exclusive use of the home office continue to be maintained to substantiate the claim.
One simplification certain to be welcomed by taxpayers is the distinction between expenses, which heretofore had to be allocated between personal use and business use. Provided you itemize your deductions and have opted for the “safe harbor method,” and of course to the extent it is allowed by the IRS’ tax codes and regulations, expenses such as mortgage interest, casualty losses and/or real estate taxes, etc., can be listed as an itemized deduction on Form 1040’s Schedule A.
While the safe harbor method has its benefits, a taxpayer might have to accept sacrifices, too. Specifically, under the “safe harbor method,” depreciation of the space allocated to the qualified home office cannot be deducted. That might make the “safe harbor” option a lot less attractive for some taxpayers as in some instances depreciation is the single largest of all the home office related deductions in which case the regular or convention method might be the better choice.
Taxpayers can opt for the safe harbor method or the regular method on a year to year basis, however once the election is made for any given tax year it is irrevocable. A taxpayer may opt for the safe harbor method and switch back to the conventional method in a subsequent year however there are specific rules in the calculation of depreciation.
Safe Harbor Method Limitations
As can be expected, the IRS has placed a few limitations on the “safe harbor” method deduction:
- • The deduction is limited to $1,500 per year, meaning that your home office space should not exceed 300 square feet; the exception to this, however, is dependent upon how many qualified home offices are under the same roof.
- • The option chosen, whether the “safe harbor” method or the conventional (actual expenses) method must be consistently applied to all the Taxpayers’ qualified businesses.
- • Taxpayers who share a home, regardless of filing status, may each claim the safe harbor deduction provided they have separate and distinct home office areas.
- • Taxpayers who have more than one qualified home office, i.e. in more than one home, may use the safe harbor method for only one home office space.
- • A taxpayer cannot opt for the safe harbor method if he or she derives rental income from the same home as the qualified business use.
- • The safe harbor method is not applicable for those Taxpayers reimbursed by an employer for home office related expenses.
The “safe harbor method” is optional according to the IRS, and taxpayers might want to evaluate now whether they will opt for this method or the conventional one as they begin their tax planning preparations for 2013. While a tedious and mind-numbing exercise, in the end it may be financially beneficial to tally up all of those numerous invoices, expense reports and receipts and go with the conventional method. The criteria necessary to be deemed as a qualified home office must have already been satisfied with the IRS in order to opt for the “safe harbor” method.
Always consult with your tax professional as to specific tax advice for your particular situation.