In 2018, you have a choice of methods to calculate the tax deduction for your home business use. You can use the Regular Method or the Safe Harbor Method for home office deduction. This is sometimes called the Simplified Option Method. The Regular Method has the requirements of allocation, calculation, and substantiation that are burdensome and complicated for small business owners. The IRS intends the Safe Harbor Method to ease this burden.
Here are the main points of the Safe Harbor Method:
- There is a standard deduction of $5 per square foot of your home used for business.
- You are limited to 300 square feet.
- You cannot claim home depreciation.
- You cannot later recapture depreciation for the years you used the Safe Harbor Method.
Let’s talk about selecting a method.
- You can choose either method in any taxable year.
- You can change the method you use in subsequent years.
- Once you choose a method, you cannot change it later in the same taxable year.
- If you use the Safe Harbor Method one year and then in a later year you use the Regular Method, you must use the appropriate optional depreciation table.
To help you choose between these two methods, here are the pros and cons for each.
The Regular Method
- The square footage in your home used for business is not limited.
- A percentage of your allowable expenses can be deducted.
- Depreciation of the portion of your home you use for business is allowed.
- Recapture of depreciation on gain is allowed when you sell your home.
- The deduction amount that exceeds the gross income of the business can be carried over.
- Loss carryover from the use of the Regular Method in the previous year may be claimed if the gross income test is met.
- The burden of documentation is very heavy for many small businesses. All records of actual expenses must be kept and maintained.
- Filing your tax return will be more complicated. You will need Schedule A and a business schedule; either Schedule C or Schedule F.
The Safe Harbor Method
- Filing your tax return is simplified. A standard deduction of $5 per square foot is claimed in lieu of a Schedule A.
- You can still claim home-related itemized deductions in full on Schedule A.
- 300 square feet is the limit you can claim for business use.
- This method may yield a smaller deduction than the Regular Method.
- You cannot use this option for more than one home in a taxable year.
- You may not claim a depreciation deduction.
- No recapture of depreciation when you sell your home for those years you used the Safe Harbor Method.
- The amount of deduction that exceeds the gross income of the business cannot be carried over.
- If you used the Regular Method in the previous year, loss carryover cannot be claimed.
Other aspects of these two methods are similar to each other. To learn more about how to calculate your tax deduction for your home business, contact a tax consultant. In West Palm Beach, Florida, you can call The Balance Sheet at (561) 501-3080 or visit us at www.taxaccountingbookkeeping.com.