Home Office Deduction - Safe Harbor Method

Beginning January 1, 2013, taxpayers have the option of using the Safe Harbor Method for computing expenses for their home office deduction.

IRC Section 280A permits taxpayers to deduct expenses allocable to the business-use portion of a residence, including areas used for home office, for the storage of inventory or product samples, for providing day care to children or elderly or disabled individuals.

The home office deduction attributable to the dwelling unit are limited to the activity's gross income for the tax year reduced by deductions that are allowable regardless of the business use portion of the home.  Such deduction include qualified home mortgage interest, property taxes, casualty losses, and other allowable trade or business expenses not related to the dwelling unit.

In an attempt to reduce the administrative, recordkeeping, and compliance burdens of taxpayers, the IRS has offered a safe harbor method to compute the allowable deduction for the business-use portion of the home.  The safe  harbor  method is not in addition to the allocation of actual expenses of the home office, but rather serves as an alternative.

Under the safe harbor method, the taxpayer multiplies the allowable square footage of the home office by the prescribed rate of $5.00.  The allowable square footage cannot exceed 300 square feet, therefore, the maximum deduction is $1,500. The safe harbor deduction, similar to the actual expense allocation  method, cannot exceed the business income for the year reduced by business expenses unrelated to the dwelling unit.  Any taxpayer using the safe harbor method may not carry over any disallowed safe harbor deductions to the next year.  In addition, you cannot deduct any deprecation for the business-use portion of the home for that taxable year.  The depreciation deduction allowable for that portion of the home for the taxable year is deemed to be zero, and there is no reduction in the basis of the home for that year. The safe harbor method provides a technique to avoid recognizing un-recaptured Section 1250 gain upon a subsequent sale.  Because a taxpayer can claim the safe harbor method in one year and actual expenses in another, some years may reduce basis and contribute to un-recaptured section 1250 gain, while others will not.

The safe harbor method does not apply to any employee with a home office who received advances, allowances, or reimbursements for expenses related to the business use of a home.

Taxpayers using the safe harbor method may deduct 100% of mortgage interest and real estate taxes on Schedule A.

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