Glenn Bailey, CPA

The IRS has issued Rev. Proc 2013-13 which promises a much simpler way to claim the home office deduction.  Beginning in 2013, a user of a qualified home office can elect to claim an expense of $5 per square foot of office space, up to 300 square feet total, instead of calculating the actual expenses. This $5 amount takes the place of utilities, cleaning, repairs, depreciation and any other expenses related to business use of the home deducted against the business income.  Mortgage interest, property taxes and casualty losses are still allowed as itemized deductions on Schedule A, but are not allocated against business income. Other non-home office related business expenses are also still allowed and are unaffected by this election.

This election may be made on a yearly basis and is valid for that year only. Once made for a given year it cannot be changed. It can be used for a home office or storage space or a home day care business. This option doesn’t apply to rental use of a home.

This safe harbor election doesn’t change the requirements for having a qualified business use of the home.  It still must be a separate space that is “regularly and exclusively” used for a business and an employee can only qualify for the deduction if the office is for the “convenience of the taxpayer’s employer”.

Of course there are a couple of technical limitations for this. One is that a person who receives an allowance or reimbursement from their employer for their use of a qualified home office is not eligible for this election. They must continue to use the full substantiation method. Also a person may not deduct any prior year disallowed amount of home office deduction in a year where they have made the simplified election and they can’t generate an additional loss amount to carryover using the safe harbor method. They must continue to carry the prior disallowed amounts until they use the actual expense method again.

The availability of this option may make your record-keeping simpler.  Depending on your particular situation the regular expense method may provide a higher deduction.

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