The ‘safe harbor’ home office deduction: Easier may not be better
Self-employed taxpayers should run the numbers both ways on how to calculate the home office deduction
Editor’s note: This article has been reviewed for changes following the passage of the 2017 Tax Cuts and Jobs Act. The information provided in this article was not affected by the 2017 TCJA.
Two self-employed taxpayers, two home offices, two home-office tax deductions.
To get the deduction, the first taxpayer keeps meticulous records, endures complex calculations, and displays endless patience with IRS worksheets. The second taxpayer breaks out his tape measure and multiplies two numbers together.
The difference between these taxpayers is the difference between the traditional calculation for the home office deduction and a streamlined calculation that the IRS introduced several years ago.
This safe harbor calculation is much easier. But for taxpayers with large offices, high expenses, or pricey homes, it may not be the best option.
How the traditional calculation works
First, there are a few tests taxpayers must meet:
Primary business location. In general, a self-employed taxpayer’s home office must be the primary business location. For people who work as employees for a company, the home office must also be for the convenience of the employer.
For example, if an employee occasionally works from home, he or she can’t claim the home office deduction. But if an employee works remotely from company headquarters, exclusively from his or her home, the taxpayer can likely claim the deduction.
Exclusivity. The taxpayer can’t use the home office for any other purpose.
Net profits. The home office deduction can’t be more than the net profits from a self-employed taxpayer’s business.
After meeting those tests, taxpayers need to figure the deduction. This requires extensive recordkeeping and many calculations. Taxpayers can deduct:
- Mortgage interest and real estate taxes, based on the percentage of square footage the home office takes up in the house
- A portion of expenses that are usually not deductible, including homeowner’s insurance, utilities, and depreciation
- Direct expenses, such as painting the office
To reduce this complexity, in 2013, the IRS introduced an optional, simplified way for taxpayers to calculate the home office deduction. It’s often called the safe harbor method.
How the safe harbor method works
This method is straightforward. After taxpayers have met the same initial tests, they don’t have to do much more than multiply the square footage of the office by $5. So, the maximum deduction using this safe harbor method is $1,500 (300 square feet maximum × $5).
Although this calculation is simpler, some taxpayers may have good reason to stick with the original calculation.
Some taxpayers should think twice about safe harbor
Taxpayers in these situations would be wise to consult a tax advisor to run the numbers.
- The taxpayer’s home office is much bigger than the maximum safe harbor dimensions. If the office is bigger than the maximum safe harbor dimensions – and especially if it takes up a large percentage of the home’s overall square footage – the regular calculation may yield a higher deduction.
- The taxpayer had higher-than-usual home expenses for the year. Perhaps a cold winter or hot summer made for higher-than-usual utility bills. Or the taxpayer had costly plumbing or electrical repairs. The portion of these costs alone allocated to the office may be more than the entire safe harbor deduction.
- The home or apartment is relatively expensive. In this case, the depreciation or rent allocated to the home office may be more than the entire safe harbor deduction.
Compare the options
For all taxpayers with a home office, it’s a good idea to run the numbers both ways to see which calculation is best. Taxpayers can also switch methods from year to year. Either way, keeping complete records and staying in touch with tax advisors on any changes regarding a home office will help taxpayers get the most out of this deduction.