Office-In-Home Safe Harbor Method

The IRS has developed a new optional safe harbor method for taxpayers claiming officein- home expenses. This safe harbor method is an alternative to the calculation, allocation, and substantiation of actual expenses under section 280A. For tax years beginning on or after January 1, 2013, taxpayers have two choices for deducting office-in-home expenses. - Continue to use the actual expense method, or - Use the new optional safe harbor method. General rule. Section 280A generally disallows any deduction that is otherwise allowable as a business expense if it is related to a dwelling unit that is used as a residence by the taxpayer during the year. This is true even if the dwelling unit is used in the taxpayer’s trade or business. An exception applies for mortgage interest, property taxes, and casualty losses, which are deductible regardless of whether the residence is used for business purposes. Another exception to the general rule is if the taxpayer uses the residence for business and meets all the following requirements. - Exclusive use test. An area of the home is used exclusively for business and not for personal purposes. Exceptions to the exclusive use test include an area used for the storage of inventory or product samples and areas used as a day care facility. - Regular use test. The area must be used on a regular basis. Incidental or occasional business use does not count. - Trade or business test. The area used for business must be used in connection with a trade or business. A profit-seeking activity for investment purposes, such as buying and selling stocks or managing a rental unit, that is not conducted as a trade or business does not qualify. - Principal place of business test. The trade or business can have more than one location. However, the area in the home used for business must be the principal place of business for that trade or business. For this purpose, an area used for administrative or management activities qualifies if there is no other fixed location where substantial administrative or management activities are conducted.