Simplified Home Office Deduction
The IRS has recently announced a simplified safe harbor method that individuals may use to compute their home office deduction. This safe harbor calculation is an alternative to the current calculation and allocation of actual expenses otherwise required under IRC Sec. 280A. The new optional deduction is limited to $1,500 per year based on a rate of $5 multiplied by the square footage of the home used for business purposes (up to 300 square feet). Here are 4 things you should know before selecting to use the safe harbor method:
- No depreciation or Section 179 deduction for the portion of the home used in a business is allowed for the year,
- Disallowed amounts carried over from a prior tax year where the taxpayer calculated and substantiated actual expenses may not be deducted in a year in which the safe harbor was used
- Taxpayers may elect the method from year to year; and,
- All requirements of Section 280A must continue to be satisfied in determining eligibility to claim a deduction.
Although homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim all allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method. Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.
Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.
The new simplified option is available starting with the 2013 return most taxpayers will file in early in 2014. If you have any questions or want further details on the new option, you can goto Revenue Procedure 2013-13, or just give us a call.