September 21, 2013

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.

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