written by Tiffany Montileone


The IRS has announced a new optional safe harbor method, effective for tax years beginning on or after January 1, 2013, for determination of deductible home office expenses for individuals. Being hailed by many as a long-overdue simplification option, taxpayers may now elect to determine their home office deduction by simply multiplying a prescribed rate by the square footage of the portion of the taxpayer’s residence used for business purposes. Under the new method, a significantly simplified form is used. The new optional deduction is limited to $1,500 per year, based on $5 per square foot for up to 300 square feet.

Taxpayers may elect from tax year to tax year whether to use the safe harbor method, but the decision is irrevocable once made for a specific year. The IRS has provided rules for calculating the depreciation deduction if a taxpayer uses the safe harbor for one year and actual expenses for a subsequent year. The deduction of expenses that are not related to the home, such as wages and supplies, is unaffected and those deductions are still available to those using the new method.

The simplified method is not effective for 2012 tax year returns being filed during the current 2013 filing season, but it will become effective for 2013 tax year returns filed in 2014. Taxpayers may want to investigate now whether they could benefit from the election for the 2013 tax year. IRS Commissioner Steven Miller advised that “The IRS … encourages people to look at this option as they consider tax planning in 2013.” A final decision on the election need not be made until 2014, when 2013 returns are filed.

Two Options
There are two other options for calculating deductions for a home office; the square foot method and the percentage method. Use of the new simplified method is up to the individual taxpayer, as it sometimes is not the most advantageous. For example:

Daniel uses one bedroom of his two bedroom apartment as the principal office of his business. The home office is 100 square feet. The total square footage of his four-room apartment is 556 square feet. His monthly rent (which includes utilities) is $1,800/month.

Using the regular square foot method, he can deduct 18 percent of his rent (100/556). With this method, his deduction is $324/month or $3,888 per year.

Using the regular percent method, he can deduct 25 percent of his rent (1/4). So, his monthly deduction would be $450/month or $5,400/year.

Either of these methods would give Raymond a substantially higher deduction than the $1,500 he could claim using the simplified method.

As you can see in the example above, simplicity does not always translate to dollars when it comes to taxes. In order to make the best decision concerning your taxes, it is always advantageous to contact a tax professional with any questions or concerns. Feel free to contact our professionals at The Whitlock Company 417-881-0145.