If you have a home office, the IRS has recently come out with some very good news in Rev Proc 2031-13: a simpler method for calculating the Office-In-Home deduction will be available for your 2013 tax return. In place of the 43-line Form 8829 that was previously required to take the home office deduction, the new optional safe-harbor method allows a $5 deduction for every square foot of home office space, up to 300 square feet (a $1,500 deduction cap). Gone will be the days of sorting through old utility and insurance bills and then allocating the annual expenses between your Schedule C, Schedule A, Form 8829, and nondeductible portions (calculations that even da Vinci would admire). Now, anyone who has a measuring tape and their multiplication tables down can compute their deduction.
It sounds simple… and it is. That is what the IRS was aiming for, as its Acting Commissioner Steven T. Miller described the new option as “a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction.” This reasonable change comes on the heels of Congress’s permanent extension and inflation indexing of the AMT patch, another responsible fix. And, while simpler is… well… simpler, it is not always better. Let’s get into the new safe-harbor option a little bit deeper and see what it's all about.
First, the new option is only available if you previously qualified to take the home office deduction. In general, in order to take a home office deduction, previously and going forward, you need to have an actual office in your home. Having a quasi-art studio in your bedroom or working from your laptop on your living room couch Friday afternoons doesn't cut it. The portion of your home dedicated to business must be separate from your personal space. More information on if you qualify for the home office deduction can be found on the IRS website.
Second, the safe-harbor method is an alternative to deducting actual expenses – it is one or the other, not both. However, when choosing the safe-harbor method, certain deductions that would have been allocated to Form 8829 under the regular method do not need to be allocated between personal and business use. Mortgage interest, real estate taxes, and casualty losses can be claimed in full as itemized deductions on Schedule A. Additionally other business expenses unrelated to the business use of the home, such as office supplies, wages and advertising expenses can still be fully deducted on Schedule C. Only property-related expenses previously reported on Form 8829, such as rent and depreciation, are prohibited when the safe-harbor method is chosen.
Another thing to note is that this safe-harbor is just being offered as an optional method. If you still want to scour over every office, insurance, yard maintenance, and utility expense you paid and then apply the Galileo-like allocation formulas required for Form 8829 go ahead – and if you can claim a larger deduction that way you should! While the safe-harbor method may be more convenient, it may yield a lesser deduction than taking actual expenses. It is important to examine your expenses each year and determine whether the benefit you receive from claiming a larger deduction under the actual method is worth the additional work. If you would receive a larger deduction by using the safe-harbor method, you have the best of both worlds.
All in all it seems like the IRS is doing us a favor with the new safe-harbor provision and we’ll chalk this one up as a win for Joe Taxpayer. A simplified office-in-home deduction that still allows you to fully deduct all of your itemized deductions and business expenses seems like a win-win. The Tax Warriors only caution is not to get too comfortable with the safe-harbor and pass up a larger deduction. A little hard work never killed anyone… and after all, you are working from home.
Still have questions? Feel free to click "Ask A Tax Warrior" below. One of our tax experts will be glad to discuss your options.