The IRS allows taxpayers to use an optional safe harbor method when claiming a home office deduction.
The safe harbor method saves the taxpayer from having to substantiate, calculate and allocate deductible home office expenses, a procedure that is part of the nightmare taxpayers have to go through if they want to use the old actual expense method.
With the optional method, the taxpayer simply calculates the number of square feet used for the office and multiplies that number times $5. The maximum square footage that can be used is 300, so the maximum home office deduction at the present moment is $1,500.
The IRS can adjust the $5 rate as warranted.
The safe harbor deduction may not exceed the gross income from the business. If it does, the excess may not be carried forward.
Taxpayers using the safe harbor method will not be able to depreciate the portion of their home used in the trade or business. But the advantage is the taxpayer may deduct mortgage interest, real estate taxes and any casualty loss as itemized deductions on Schedule A of Form 1040.
The taxpayer would still be allowed to deduct, to the extent allowed by the Internal Revenue Code and regulations, any trade or business expenses unrelated to the qualified business use of the home for that taxable year. Some examples would be advertising and office supplies.
If reimbursed by an employer for the home office expenses, a taxpayer cannot use the safe harbor method.
The taxpayer may elect from taxable year to taxable year whether to use the safe harbor method or to calculate and substantiate actual expenses for the purpose of the home office deduction. A method is elected simply by using the particular method for that tax year. A method once selected for that tax year cannot be changed.