Last January, The Tax Warriors® alerted our readers to a new home office deduction option offered by the IRS. The basic idea of this new option is if you are someone who struggles with accounting for every receipt and expenditure, and thus may have holes in your overall home-office expense recordkeeping; the new “safe harbor” option may be an easier option for you.
The IRS revised Publication 587 (Business Use of Your Home) for use in preparing 2013 returns. The revised publication clarifies important aspects of the new optional safe harbor method of computing deductions for business use of a home, including a new, comprehensive and simplified deduction worksheet (See page 29 of Publication 587).
In order to reduce the administrative burdens of determining the allowable deduction for the qualified business use of a residence, Revenue Procedure 2013-13 provides the new optional safe harbor method under which you may determine your allowable deduction for the qualified business use of your home. Simply multiply the prescribed rate ($5 for 2013) by the square footage of home office that is exclusively for business purposes, not to exceed 300 square feet, for a maximum home office deduction of $1,500.
NOTE: The new safe harbor method, similar to all home office deductions, would not apply to you as an employee with a home office if you receive advances, allowances, or reimbursements for expenses related to the qualified business use of your home under a reimbursement or other expense allowance arrangement with your employer.
Since the safe harbor is an alternative to deducting actual expenses, if it's used for a tax year, you generally can't deduct any actual expenses related to the qualified business use of your home for that tax year, with the following exceptions:
Otherwise allowable home-related deductions.
In the event you itemize deductions and use the safe harbor, you may deduct any allowable expenses related to your home that are deductible without regard to whether there was a qualified business use of your home for that tax year (e.g., deductions for qualified residence interest, property taxes, and casualty losses). Using the safe harbor method allows you to deduct these expenses as itemized deductions on Form 1040, Schedule A. Be careful to not deduct any part of these expenses from the gross income derived from the qualified business use of your home-either for purposes of determining the net income derived from the business or for purposes of determining the gross income limitation.
If you are using the safe harbor for a tax year, you can't deduct any depreciation for the part of your home that is used in a qualified business use for that tax year.
If you calculate and substantiate actual expenses for a later year, you must calculate the depreciation deduction by using the appropriate optional depreciation table applicable for the property regardless of whether you used an optional depreciation table for the property in its placed-in-service year.
Prior-year Disallowed Deductions.
If you are using the safe harbor method for a tax year, you can't deduct any disallowed amount carried over from a prior tax year during which you calculated and substantiated actual expenses. You can deduct the carried-over amount in the next succeeding tax year in which you calculate and substantiate actual expenses.
The Tax Warrior® Perspective
It may be more beneficial to deduct actual expenses in a year in which you have net business income that is preceded by a year in which the business use of your home contributed to a net loss. If you have carryover of disallowed home office expenses from prior years, this issue should be reviewed annually by your tax advisor.
Electing the safe harbor.
You may elect the safe harbor method by using the method to compute the deduction for the qualified business use of your home on your timely filed, original federal income tax return for tax year beginning on or after January 1, 2013. The annual election is irrevocable. However, a change from using the safe harbor method in one year to actual expenses in a succeeding tax year (or vice-versa) is allowed.
Shared use. Individuals, who share a home (for example, roommates or spouses, regardless of filing status), may each use the safe harbor method, but not for a qualified business use of the same portion of the home. For example, a taxpayer and spouse, if otherwise eligible and regardless of filing status, may each use the safe harbor method for a qualified business use of the same home for up to 300 square feet of different portions of the home.
More than one qualified business use. If you conduct more than one qualifying business in your home, the election to use the simplified safe harbor method applies to all qualified business uses of that home. However, you still are limited to a maximum of 300 square feet for all of the businesses.
More than one home. If you used more than one home for business during the year (you moved during the year), the election to use the simplified Safe Harbor method may be made for only one of the homes. Deductions relating to the other home(s) must be based on actual expenses.
Part-year use or area changes. If qualified business use was for a portion of the tax year or you changed the square footage of the qualified business use, the simplified safe harbor deduction is limited to the average monthly allowable square footage. Qualified business use of less than 15 days in a month doesn't count.
Although we blogged about this last year, we thought this tax law change was important to remind our readers as they prepare for their 2013 tax return preparation. Options such as this safe harbor are extremely helpful in eliminating the need to be fastidious with prior year’s receipts for your home office use, however they have their limitations.
Stay tuned for future posts on more of the many 2013 tax law changes. There were many additions as well as expired or deleted provisions from the tax code, and being aware of them is half the battle! The Tax Warriors® at Drucker & Scaccetti are always prepared to help you with this or any other tax-related matter. Call on us via “Ask A Tax Warrior” below. We’d be happy to help you sort through the maze of 2013 tax changes for those provisions that may affect you or your business.