January 17, 2013
Revenue Procedure 2013-13 – Optional Safe Harbor Method for Home Office Deduction
On January 15th, the IRS released Revenue Procedure 2013-13, which provides individual taxpayers an optional safe harbor method to determine the amount of deductible expense attributable to business use of a personal residence. This optional safe harbor method is effective for taxable years beginning on or after January 1, 2013.
The computation of the safe harbor amount is based on the taxpayer’s qualified business use of the home for the taxable year by multiplying the allowable square footage by a prescribed rate of $5 per square foot attributable to the actual portion of the home used in a qualified business, not to exceed 300 square feet. The maximum deduction under the safe harbor method may not exceed $1,500.
This safe harbor method is an alternative to the calculation and allocation of actual expenses (actual expenses method) otherwise required by law. A taxpayer electing the safe harbor method for a taxable year cannot deduct any actual expenses related to the qualified business use of that home for that taxable year. However, a taxpayer using the safe harbor method may deduct, to the extent allowed by the code and regulations, any expenses related to the home that are deductible, without regard to whether there is a qualified business use of the home for that taxable year such as qualified residence interest, real estate taxes, and casualty losses as itemized deductions on Form 1040, Schedule A.
The safe harbor method provided by this revenue procedure does not apply to an employee with a home office if the employee receives advances, allowances, or reimbursements for expenses related to the qualified business use of the employee’s home under a reimbursement or other expense allowance arrangement.
The safe harbor election or the use of actual expense method may be made each year and can be changed from year to year. Election is made by using the method to compute the deduction for the qualified business use of a home on a timely filed original federal income tax return for the taxable year. The election, once made, is irrevocable.
No depreciation is allowed for the years in which the safe harbor is elected. However, depreciation is permitted in the years in which the actual expenses method is used.
Other limitations on using the safe harbor method:
- Taxpayers must continue to satisfy all the other requirements for a home-office deduction, including the requirement that the space in the residence used as an office be used exclusively for that purpose and the limitation that an employee qualifies for the home-office deduction only if the office is for the convenience of the taxpayer’s employer.
- The amount of deduction cannot exceed the amount of gross income derived from the qualified business use of the home minus business deductions, and any excess cannot be carried over and claimed in another tax year.
- A taxpayer with qualified business uses of more than one home for a taxable year may use the safe harbor method for only one home for that taxable year. However, the taxpayer, if otherwise eligible, may use the actual expenses method for the business use of any other homes for that taxable year.