What is the Small Business Home Office Safe Harbor Deduction
The new business use of home safe harbor option has revolutionized the much maligned home office deduction. I am sure that many of you were like me when I start my small business, scared to death of the IRS. Currently, I run my CPA / Virtual CFO firm out of my home office so this is an essential deduction.
It was common practice for many accountants to talk clients out of the home office deduction because the IRS continually scrutinized the deduction. However, in 2013, taxpayers are generally permitted to use a simplified method of calculating home office deduction. Even now, when I talk to clients, they want to know how does the home office safe harbor work. Should they be willing to take the deduction?
How Does The Home Office Safe Harbor Work
The optional home office safe harbor deduction is limited to $1,500 per year based on $5 per square foot for up to 300 square feet. A cool feature of is that you can elect from year to year whether or not to use the safe harbor method or use actual expenses. If the home office square footage changes during the year then you can average the square footage but the total must stay under 300 square feet.
If a husband and wife both have home offices then each may each use up to 300 square feet for different portions of their home. However, a single taxpayer with multiple businesses operating out of a home may not take a deduction for more than 300 square feet total. The deduction will normally flow into your Form 1040 Schedule C.
More info can be found at the IRS website.
Limitations of the Home Office Safe Harbor Deduction
Of course there are always limitations so here is a list of the main things of which you should be on the look out.
- The taxpayer electing safe harbor method is not permitted to deduct the actual expenses related to qualified business use of home for that tax year. Don’t worry, you will be able to claim allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A.
- Employees with a home office who receive qualified business use of the home advances, allowances, or reimbursements from his/her employer is not eligible for the safe harbor method.
- After the election is made, it is irrevocable for that tax year.
- If the home office safe harbor deduction option is chosen then there are depreciation limitations. Generally, the taxpayer can’t deduct any depreciation or Section 179 expense for the portion of the home that is used as a qualified home office for that year. If in a future year you decide to not use the safe harbor method then you must calculate the depreciation deduction allowable for that year. The depreciation is computed for that year would be figured by multiplying the remaining adjusted depreciable basis of the home by the annual depreciation rate for that year. However, if you choose to do such a thing please consult your CPA or do some additional research.
- A single taxpayer with multiple businesses operating out of a home can’t take a deduction for more than 300 square feet total.
- The home office deduction restrictions still apply, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business.
Have you been reluctant to take the home office deduction in the past?