Beginning with tax year 2013 returns (filed in 2014), taxpayers may elect to use a simplified “safe harbor” option when figuring the deduction for business use of their home.
Recognizing that the calculation, allocation, and substantiation of allowable deductions attributable to the use of a portion of the taxpayer’s residence for business purposes can be complex and burdensome for small business owners, the IRS and the Treasury Department have provided an optional safe harbor method to reduce the administrative, recordkeeping, and compliance burdens of determining the allowable deduction for certain business use of a residence under Internal Revenue Code § 280A.
Under this safe harbor method, taxpayers determine their allowable deduction for business use of a residence by multiplying a prescribed rate by the square footage of the portion of the taxpayer’s residence that is used for business purposes.
Note: The simplified option does not change the criteria for who may claim a home office deduction. It merely simplifies the calculation and recordkeeping requirements of the allowable deduction.
Highlights of the simplified option:
- Standard deduction of $5 per square foot of home used for business (maximum 300 square feet).
- Allowable home-related itemized deductions claimed in full on Schedule A. (For example: Mortgage interest, real estate taxes).
- No home depreciation deduction or later recapture of depreciation for the years the simplified option is used.
Comparison of methods
|Simplified Option||Regular Method|
|Deduction for home office use of a portion of a residence allowed only if that portion is exclusively used on a regular basis for business purposes||Same|
|Allowable square footage of home use for business (not to exceed 300 square feet)||Percentage of home used for business|
|Standard $5 per square foot used to determine home business deduction||Actual expenses determined and records maintained|
|Home-related itemized deductions claimed in full on Schedule A||Home-related itemized deductions apportioned between Schedule A and business schedule (Sch. C or Sch. F)|
|No depreciation deduction||Depreciation deduction for portion of home used for business|
|No recapture of depreciation upon sale of home||Recapture of depreciation on gain upon sale of home|
|Deduction cannot exceed gross income from business use of home less business expenses||Same|
|Amount in excess of gross income limitation may not be carried over||Amount in excess of gross income limitation may be carried over|
|Loss carryover from use of regular method in prior year may not be claimed||Loss carryover from use of regular method in prior year may be claimed if gross income test is met in current year|
Selecting a Method
- You may choose to use either the simplified method or the regular method for any taxable year.
- You choose a method by using that method on your timely filed, original federal income tax return for the taxable year.
- Once you have chosen a method for a taxable year, you cannot later change to the other method for that same year.
- If you use the simplified method for one year and use the regular method for any subsequent year, you must calculate the depreciation deduction for the subsequent year using the appropriate optional depreciation table. This is true regardless of whether you used an optional depreciation table for the first year the property was used in business.