Home Office Deduction Safe Harbor

In addition to being a rumored audit risk, the deduction for a home office has been relatively complex, both the deduction calculation itself as well as its effect on other parts of Form 1040. For example, under the regular home office deduction method, actual expenses such as rent, real estate taxes, internet, gas and electric, phone, insurance, and other costs attributable to the square footage of the home office space must be calculated and detailed records maintained. Furthermore, home-related itemized deductions must be apportioned between Schedule A and Schedule C. Finally, while depreciation can be deducted for the portion of the home used for business, that depreciation must be recaptured upon the sale of the home.

In Revenue Procedure 2013-13, the IRS has provided an easier option. Using the "simplified" or "safe harbor" home office deduction method, a business owner can take a standard $5 deduction for each square foot of the home used exclusively for business, up to 300 square feet. There is no need to apportion house expenses to the office space, and all home-related itemized deductions may be claimed in full on Schedule A.

There is no home depreciation deduction or later recapture of depreciation for the years the simplified option is used. While deduction amounts in excess of gross income may not be carried forward as in the regular method, preparing Form 8829 is not required when electing the simplified method; calculated expenses are simply entered on Line 30 of Schedule C.

The criteria for who can take the regular or simplified home office deduction is the same: The room or section of the home used for business must be exclusively used on a regular basis (1) as a place of business used by patients, clients, or customers; (2) in connection with the trade or business if it is a separate structure unattached to the home; or (3) as the principal place of business. A home office will qualify as a principal place of business if it is used exclusively and regularly for administrative or management activities of the trade or business and no other fixed location for conducting substantial administrative or management activities of the business exists.

The IRS is strict about the exclusivity requirement. If the home office doubles as a guest bedroom, for example, the taxpayer does not qualify to take the deduction. However, the home office can be a section of a room if clearly partitioned from the rest of the room and personal activities are excluded from the business section.

While the extra complexity of the regular home office deduction method may be worth it for large home offices with high expenses, the simplified method is a good option for many other business owners who work out of their house.