Simplified Option for Claiming the Home Office Deduction
Since 2013, taxpayers may use a simplified method for claiming the home office deduction, eliminating the need to record expenses or depreciation. Instead, a business owner may choose ithe simplified option on Schedule C, Profit or Loss from Business, simply multiplying $5 by the number of square feet — up to 300 — used exclusively for business — so, obviously, the maximum deduction under this safe harbor rule for any taxpayer is $1,500. Rev. Proc. 2013-13
However, daycare providers must reduce the $5 by the proportion of the daycare business hours divided by the total number hours in the year, 8760.
The IRS has provided full instructions and the Simplified Method Worksheet, including special instructions and a worksheet for daycare providers, to calculate the home office deduction using the simplified method in the instructions for Schedule C.
If the home office was not used exclusively for business during the entire year, then the deduction is reduced by a percentage, equal to the number of months for which the home office was qualified divided by 12, the number of months of the year. A month can only be counted if there was at least 15 days of qualified use during the month.
Neither direct nor indirect expenses or depreciation can be deducted using the simplified option.
This safe harbor method will not affect any deductions available to the homeowner even if no part of the home was used for a business, such as deductions for the qualified residence interest, property taxes, and casualty losses. However, using actual expenses allows the apportionment of these deductions between business use and regular use. The business-use deduction will decrease self-employment taxes and marginal taxes, even if the itemized deductions do not exceed the standard deduction.
An election to use the safe harbor provision is made on the taxpayer's tax return for that year. Each year, the taxpayer can choose the safe harbor provision or to deduct actual expenses, but if the safe harbor option is chosen for a particular tax year, then it becomes irrevocable for that year. Furthermore, the safe harbor provision does not allow any depreciation, including first-year depreciation under §179, to be claimed for the business use of the home for that tax year. Any subsequent claim of depreciation using actual expenses in a later tax year will be calculated according to the applicable depreciation table and tax year. The depreciation that could have been claimed, but for the safe harbor, are forever lost. However, if the safe harbor method is used exclusively, then there is no depreciation recapture when the home is sold.
The amount of the safe harbor deduction cannot exceed the income earned by the business minus any business deductions that are unrelated to the qualified business use of the home, which is the same rule that applies to the regular home office deduction. In other words, the deduction cannot exceed net income from the business. Moreover, any excess deduction over net income cannot be carried forward to another tax year — it is lost forever. Furthermore, any excess deduction cannot be carried from a previous tax year in which actual expenses was used to a tax year in which the safe harbor provision is chosen. However, the excess deduction resulting from calculating actual expenses can be carried forward to a year in which actual expenses are used again.
The maximum square footage claimable under the safe harbor provision is 300 ft.² If the square footage changes during the year, then the square footage for each month must be added, then divided by 12, the number of months in the year. However, no month can be counted unless the taxpayer had at least 15 days of qualified businesses use during the month. If more than 1 home was used for a business, then the simplified option can only be used for 1 home; actual expenses must be used for any other homes.
If you started using 350 ft.² of your home as a business on June 17, then the average monthly allowable square footage that can be claimed = 300 × 6/12 = 1800/12 = 150 ft.² Note that only the maximum 300 ft.² is used in the calculation and that the month of June is not counted at all, since business use was less than 15 days for the month.
Taxpayers who lived together, including those married and filing jointly, can claim separate sections of their home for different businesses. Safe harbor rules apply to each separately, so a husband and wife who used 2 different sections of the house for different businesses can claim up to 600 ft.² using the safe harbor provision.
If the taxpayer has 2 businesses that uses different sections of the home, then an election of the safe harbor provision must apply to both businesses, and since a single taxpayer conducts both businesses, the total square footage that can be claimed is still limited to 300 ft.² If the taxpayer has more than one home in which a business is claimed for each, then the safe harbor provision can only apply to one of those homes; any home office deduction claimed for the other businesses must use actual expenses.
The safe harbor choice would be better than using the regular method of calculating the home office deduction if the business-use area is small compared to the total square footage of the house.
- Prior to the Tax Cuts and Jobs Act, an employee, who used a portion of his home to conduct his employer's business, but only at the convenience of the employer, could use the safe harbor method for claiming the deduction. However, this method was not available to an employee with a home office if the employee received allowances or reimbursements from the employer for the qualified business use of the employee's home.