The IRS created the safe harbor method to simplify the home office deduction for many individual taxpayers, owners of home-based businesses and some home-based employees. It will be applicable to taxable years beginning on or after January 1, 2013, but the IRS has also solicited feedback on the optional method "to improve it for tax year 2014 and later years."
A taxpayer may qualify to deduct expenses for the business use of his or her home, if part of the home is exclusively and regularly used for business purposes. The home office deduction may include part of certain costs that the taxpayer paid for having a home. For example, a part of the rent or allowable mortgage interest, real estate taxes and utility payments could qualify. The amount of the deduction usually depends on the percentage of the home used for business.
The safe harbor method would allow taxpayers to deduct home office expense at USD5 per square foot for a maximum of 300 square feet of qualified home office space used, for a maximum yearly deduction of USD1,500. It is hoped that it will reduce the paperwork and record keeping burden on small businesses by an estimated 1.6m hours annually.
Eligible taxpayers claiming the home office deduction are currently generally required to fill out a 43-line form, often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming the optional deduction will complete a significantly simplified form.
Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions. These deductions need not be allocated between personal and business use, as is required under the regular method.
Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible, and current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.
In its letter, the AICPA welcomes the proposed optional safe harbor method that "would simplify the tax preparation and record-keeping process for many taxpayers and small business owners who are eligible for the deduction but who do not currently deduct home office expenses," but recommends re-evaluation of selected details.
For example, the AICPA proposes that the IRS should increase the initial maximum deduction, as estimates of average home-office deductions historically range from USD2,000 (from the National Association for the Self Employed) to USD3,000 (from the IRS itself). In addition, while the Revenue Procedure does indicate that the IRS and Treasury Department may update this rate from time to time as warranted, it believes that failing to specify up front future cost of living adjustments will make the deduction less useful and valuable to taxpayers in the future.
In further comments, the AICPA suggests that the IRS should consider allowing taxpayers who choose the safe harbor method to deduct depreciation expense, in addition to the home office deduction; taxpayers should be permitted to deduct any disallowed home office deduction carryovers in the next year, regardless of the method used; ordering rules should be established, such as that the carryovers are applied first; and any unused deduction, which was generated by use of the actual method, should be allowed to carry forward to the next tax year.
In conclusion, the AICPA "supports the concept of a simplified method to deduct home office expenses, as the safe harbor method will increase the availability of home office deductions for taxpayers who are eligible for the deduction and have not been claiming it."
However, it is recommended "that the IRS and Treasury re-evaluate and alter some of the details of their proposal to implement the safe harbour method. For taxpayers who have been claiming (or may in the future claim) the home office deduction under the actual expense method, unanticipated administrative burdens have been created for the taxpayer."
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