On Tuesday, January 15, 2013 the IRS announced that going forward, there is a simplified option for taxpayers who take the home office deduction. While the credit is capped at $1,500 a year (this may be adjusted in future years), taxpayers choosing this method will not have to deal with complex calculations of allocated expenses, depreciation and carryovers from prior years. What’s that you say? Your amazing CPA does all of these calculations for you so what does it matter? Well most importantly, the safe harbor method is an alternative to the substantiation (i.e. recordkeeping) of actual expenses. That means you don’t have to keep every utility, internet and any other home bill as substantiation for the deduction and in case of an IRS audit.
There are some important factors to consider, however. The allowable square footage used in the calculation cannot exceed 300 square feet. Also, home expenses like utilities, homeowner’s insurance, etc are not deductible under this method. Depreciation is also not allowed. Mortgage interest and real estate taxes would still be fully deductible on Schedule A (rather than apportioning it between the deduction and Schedule A) if you itemize.
The election to use the safe harbor method can be made each year, meaning you can use the safe harbor method in one year and use actual in the next. So if for some reason the filing cabinet with all of your paid bills walks out the door, you could take the safe harbor method that year and still get a deduction. Taxpayers may want to look at what their home office deduction has been in the past and see if this simpler method would be worth it on an annual basis.