Skip to main content

Safe Harbor for Home Office Deductions

Question:

As a minister, I have an office in my home because I do not have an office at the church. I heard there is a simplified method for deducting home office expenses on my 2013 tax return. Is this true? If it is true, is there an advantage to using the new method?

Answer:

The IRS has provided a safe harbor method for deducting home office expenses. The safe harbor method may be used for tax years beginning on or after January 1, 2013. Similar to the actual-expense method, the safe harbor method only permits a home office deduction if the office is used “regularly and exclusively” for business purposes.  The office must also be for the convenience of the employer.

Just because the safe harbor method is available does not mean it is the best option for you. The safe harbor method has advantages and disadvantages.

Advantages
  • Utilities, insurance, repairs and maintenance, and other expenses do not need to be tracked.
  • Allowable mortgage interest and real estate taxes may still be claimed as an itemized deduction on Schedule A.
  • Recapture of depreciation is not required when your home is sold. (This is also a disadvantage. See below.)
  • Each year you are allowed to choose the method that is most advantageous.
Disadvantages
  •  Depreciation is not permitted in years the safe harbor method is used.
  • The deduction is $5 per square foot and is limited to $1,500 (a maximum of 300 square feet).
  • Excess home office deductions may not be carried forward.
  • Loss carry forwards may not be claimed when the safe harbor method is used.
Regardless of the method chosen, you must still calculate the portion of your home used for business purposes.

Please keep in mind that if you receive a housing allowance, you should already be keeping detailed records of home expenses, which can be used when calculating the actual-expense method.

Read Revenue Procedure 2013-13 for more detailed information.

Comments

Popular posts from this blog

Rental of a Church Parsonage to a Non-Minister

Question: A church owns a parsonage, but the pastor does not use it as he owns his own home. The church rents the parsonage to a tenant other than a minister or employee of the church. Will the church be responsible for paying income tax on these monies as Unrelated Business Income (filing a Form 990-T) even if the money is used to carry on the business of the church? Answer: Whether the money is used for church purposes is irrelevant.  IRS Publication 598  states: "If an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business." Fortunately, in the case of rental income from real property, such income is "excluded in computing unrelated business taxable income" (Publication 598). Caution: see content below regarding debt-financed property.  However, a second concern not a...

How can my ministry expenses be covered by the church?

     How can my ministry expenses be covered?                            Many ministers use their personal autos for ministry purposes. Their employers can reimburse these costs using a standard mileage rate published by the IRS. The per mile rate represents employees’ entire reimbursable cost other than highway tolls and parking tabs. If not covered by use of the ministries’ credit card, other costs can be reimbursed as well—business and travel meals, lodging, office supplies, and professional library purchases among them. Some ministries reimburse travel costs using per-diems published by the IRS. If employee business expenses are not reimbursed, the personal tax deduction benefit to the individual minister is severely limited. Non-taxable reimbursements after documentation is provided to the employer follows IRS rules for accountable plans. Non-taxable cash advances before expenses are in...

What is the best retirement account for a Minister?

       What are my options for retirement savings?                  Regardless of options, start now! You probably have learned about traditional and Roth IRAs. We have often found them well short of the benefits we will share here regarding Internal Revenue Code section 403(b) plans. These plans must be established by your employer (although you might need to be the initiator). They are funded in two ways—withholding from your paycheck at your option (called “elective deferrals”) and as initiated by the employer (matching or non-elective contributions). These contributions not only save income tax, but they also reduce the income you must report as subject to the 15.3% SECA tax. Further, at retirement with the cooperation of your church or Christian ministry the distributions to you can be tax-free to the extent of your qualified housing expenses. Many ministries also adopt what are often called “FICA alternative” be...