Rev. Proc 2013-13 provides an optional safe harbor method to deduct office in home (OIH) expenses. “This safe harbor method is an alternative to the calculation, allocation, and substantiation of actual expenses associated with running a home office.”
In a nutshell, the method allows an office in home deduction to be calculated by multiplying the square footage of the office by a prescribed rate. There is no change in the qualifications – the home office must be used regularly and exclusively – the calculation is simply made simpler.
Here are the basics:
- The square footage used for the home office is limited to 300 square feet
- The prescribed rate = $5.00 (the rate may be updated in the future)
- No separate Form 8829 is required if the optional method is used
- An employee who receives any reimbursement for a home office from the employer is not eligible to use this method
- The taxpayer can make a year-by-year determination whether to use the optional method.
- An election is irrevocable for that year.
- A change to a different method in a succeeding year is not a change in accounting and requires no IRS approval.
A taxpayer who itemizes may take both the safe harbor deduction for OIH and still take a full deduction for items such as real estate taxes and mortgage interest. The safe harbor method precludes any depreciation deduction and the depreciation for that year is deemed to be zero.
The deduction for an OIH cannot create a loss.
If Form 8829 is used and there is not sufficient income for the deduction, the amount not used can be carried over to the next tax year. Conversely, any OIH deduction using the safe harbor method that is not deductible because a loss is created can not be carried over to any other taxable year. Likewise, if a loss from using the actual method is carried over to a year when the taxpayer uses the optional method, the loss may not be used as a deduction. A carryover loss from the actual method can only be used in the next succeeding tax year where the taxpayer once again uses the actual method.
What if you do not conduct business for the entire year?
What happens if there is not a full year of business use and the taxpayer wishes to use the optional method? The taxpayer must use the average of the monthly allowable square footage for the year. To determine the allowable footage, no more than 300 sq. feet can be used and a month of uses consists of use for 15 or more days in the month.
Sharing office space?
If two taxpayers share a home (roommates or spouses, regardless of filing status), they may each use the optional method (provided, of course that they qualify). But the usage can not be for the same space. Each must use a different portion of the home.
If you move into another home office
Taxpayers who move and use a portion of both homes for an OIH may use the optional method in only one home. The actual method could be used in the other home or in both homes, if there is no election to use the optional method.