Many small-business owners who work from their homes have, in the past, foregone the home office tax deduction because of the complexity of calculating it, apportioning mortgage interest and property tax, and having to take depreciation and the issues that depreciation recapture brings when selling a residence.
Now the IRS has introduced a new, and much less complex, home office deduction titled the "Safe Harbor for Office in Home."
OLD OPTION REMAINS
As with the earlier deduction - which still remains an option - the home office space must be used exclusively and regularly for business purposes. Under the new rules you determine the square footage of the space used for business, up to a maximum of 300 square feet, and use a deduction of $5 per square foot.
The deduction cannot exceed the gross income from the business using the space, less related business deductions. If your home office deduction under the Safe Harbor method exceeds your business gross income less related expenses, you cannot carry over the excess to another tax year.
TAKING LOSS CARRYOVERS
Loss carryovers from previous years using the traditional calculation for home-office expense cannot be taken in tax years when the taxpayer uses the Safe Harbor method. Taxpayers may switch calculation methods from year to year, but once elected that method must be used for the entire tax year.
When several taxpayers share the same residence and each uses a different portion of the residence for business purposes, each may each claim a Safe Harbor deduction. A taxpayer who operates several businesses from the residence can claim only the 300-square-foot maximum even if the eligible space exceeds that limit.
Under the Safe Harbor method, you do not have to apportion mortgage interest or property tax, so you can claim the full amount of those on your itemized deductions (Schedule A). And you do not have to take depreciation, so when you sell your residence your full gain is considered in the homeowner exclusion for tax purposes. There is no depreciation recovery.
Taxpayers electing the Safe Harbor method of calculating the home office deduction cannot deduct any of the traditionally allocable deductions taken on Schedule A from the gross revenue of the business as business expenses.
For taxpayers who have used the old deduction and who switch to the new option, the depreciation you have taken under the old method must still be recaptured when you sell your residence.
Before switching tax calculation methodologies, taxpayers should seek advice from competent counsel for any questions about the procedure and the implications of switching procedures.