Home Office Deduction Safe Harbor, Part I

For small business owners, home office deductions can be an important tax break. Instead of renting space, many businesses can be operated from home, lowering the business’s overhead costs and reducing the owner’s tax liability.

Until 2013, home office deductions have required a calculation method that involved depreciation and other factors. It brought confusion and complexity to tax reporting for otherwise simple returns. To simplify the process, the IRS issued a new Revenue Procedure which provides an optional safe harbor method that individual taxpayers may use to determine the amount of deductible expenses attributable to business use of a residence during the taxable year.

The safe harbor method is an alternative to the calculation, allocation, and substantiation of actual expenses for the home office. It became effective for taxable years beginning on or after January 1, 2013. Starting with the 2013 tax year, home business owners have the option of multiplying the square footage used for business purposes by $5, for a maximum deduction of $1,500. Even using the safe harbor you still must meet the requirements for the deduction for business use of the home.

If you are an employee, you can only deduct the home office if it is for the convenience of your employer. If your employer wants you to work at home to save the employer money on office space, you can claim the home office deduction. It’s not enough that the home office is helpful, it must actually be required by the employer. If you are permitted to work at home because you asked, that is not for the convenience of the employer – that is for your convenience, and you don’t qualify for the deduction.

If you are self-employed, in order to qualify to deduct a portion of home-connected expenses such as utilities, rent, depreciation, homeowner’s insurance, mortgage interest, real estate taxes, maintenance and repairs, you must be able to prove: (1) that you regularly use part of your home exclusively for a trade or business, and (2) you must also be able to prove at least one of the following:

  • you use your home as your principal place of business;
  • you meet patients, clients, or customers at home; or
  • you use a separate structure on your property exclusively for business purposes

The requirement that part of your home be used exclusively for a trade or business is a tough one. Exclusive use means that you use a portion of your home only for business. If you use a room or part of your home for business and for personal use, you don’t qualify for the deduction. If your home office doubles as a guest room, that’s not exclusive use for business.

Tune in next week for the conclusion.