Individual taxpayers, who can deduct home office expense, now have a simplified method to determine the deductible amount. Rather than keep track of all household expense and allocate the expenses based on percentage of total square footage to home office expense, simply multiply the amount of allowable square footage up to 300 square feet by $5. This safe harbor method to figure the home office deduction is elected by taking the deduction as a business expense on a timely filed return, rather than taking a allocated portion of actual expenses using form 8829. Taxpayers are allowed to switch between the two methods from year to year. However, the election made for any tax year is irrevocable.
The deduction using the safe-harbor method just like with the actual expense allocation method is limited and cannot exceed the net income of the qualified business claiming the home office deduction. Unlike the limitation under the actual-expense method, a taxpayer who uses this safe harbor method cannot carry over any excess deduction to another tax year; and carryover from an actual-expense method year to a safe-harbor year is not allowed.
If the safe harbor method is used, no depreciation is allowed for the years in which the safe harbor is elected. Home mortgage interest and property taxes are still deductible as itemized deduction if the safe harbor method is used.
To use the safe-harbor method, taxpayers must continue to satisfy all the other requirements for a home office deduction, including that the space be used exclusively for the qualified business purpose and that an employee qualifies for the deduction only if the office is for the convenience of the taxpayer’s employer.
Taxpayers sharing a home regardless of filing status or relationship, if otherwise eligible, may each use the safe-harbor method, but not for qualified business use of the same portion of the home. Taxpayers who have a qualified business use of more than one home for a tax year may use the safe harbor for only one home and must use the actual-expense method for the other home or homes.