IRS Introduces New Safe Harbor Home Office Deduction

• Annual Election -  A taxpayer may elect the safe-harbor method or the regular Sec 208A method on an annual basis. Thus a taxpayer may freely switch between the methods each year. The election is made choosing the method on a timely filed original return and is irrevocable for that year.
  
  
• Depreciation -  When the taxpayer elects the safe-harbor method, no depreciation deduction (including additional first year or Sec 179) for the home is allowed and the depreciation for the year is deemed to be zero.
  
  
• Additional Office Expenses – Additional office expenses such as utilities, insurance, office maintenance, etc., are not allowed when the safe-harbor method is used.
  
  
• Home Interest and Taxes – Prorated home interest and taxes are not allowed as an office expense when using the safe-harbor method. Instead, 100% of the home interest and taxes are deductible as usual on Schedule A.
  
  
• Deduction Limited by Business Income – As is the case with the regular Sec 280A method, under the safe harbor method the home office deduction is limited by the business income. For the safe-harbor, the deduction cannot exceed the gross income derived from the qualified business use of the home for the taxable year reduced by the business deductions (deductions unrelated to the qualified business use of a home). However, unlike the regular method, any amount in excess of this gross income limitation is disallowed and may not be carried over and claimed as a deduction in any other taxable year.
  
  
• Sec 208A Home Office Carryover – Cannot be used in a year the safe-harbor method is used. The carryover continues to future years and can only be used when the regular method is used.
  
  
• Qualifications – A taxpayer must still meet the Sec 208A qualifications to use the safe-harbor method.
  
  
• Reimbursed Employee – The safe harbor method cannot be used by an employee who receives advances, allowances or reimbursements for expenses related to qualified business use of his or her home under a reimbursement or other expense allowance arrangement with the employer.
  
  
• Determining Square Footage - To determine the average square footage of the business, use these guidelines:
  
  
  o Square Feet Maximum - Never use more than 300 square feet for any month, even if the taxpayer has multiple businesses. Where there are multiple businesses use a reasonable method to allocate between businesses.
  
  o Determining Average Square Feet for the Year - Use zero for months where there was no business use, or where the business was not for a full year.
  
  o 15-Day Minimum – Don’t count any month in which the business use is less than 15 days.
  
  As example, a taxpayer begins using 400 square feet of her home for business on July 20, 2013 and continues using the space as a home office through the end of the year. Her average monthly allowable square footage for 2013 is 125 square feet (300 x 5 months = 1500/12 = 125).
  
  o Multiple Businesses - Where there are multiple businesses only one method may be used for the year, either the regular or safe-harbor.
  
  o Mixed Use Property - A taxpayer who has a qualified business use of a home and a rental use for purposes of § 280A(c)(3) of the same home cannot use the safe harbor method for the rental use.
  
  o Taxpayers sharing a home - Taxpayers sharing a home (for example, roommates or spouses, regardless of filing status), if otherwise eligible, may each use the safe harbor method, but not for a qualified business use of the same portion of the home.
  
  As example, a husband and wife, 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.
  
  o Depreciation Rate When Switching Methods – When the safe-harbor method is used, and subsequently the taxpayer switches back to the regular method, then use the depreciation factor from the appropriate optional depreciation table as if the property had been depreciated all along.
  
  As example, a property was placed in service in July of 2010. The safe-harbor method is used in 2013 and then in 2014 the taxpayer switched back to the regular method. For 2014 the depreciation factor from the table would be 2.564.