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Tax Tip: Safe Harbor for Home Office Expenses

Posted: August 5, 2013, 12:00 p.m. EDT

By Mark E. Battersby

Pet dealers and pet services professionals who run their businesses from home offices or use home offices for management tasks will be happy to learn that the Internal Revenue Service has announced a new "safe harbor” that will allow them to deduct as much as $1,500 of the expenses of maintaing and operating that home office, all the while reducing the administrative, recordkeeping and compliance burdens—and audit risk—faced by everyone who has ever attempted to claim a tax deduction for home office expenses.


The IRS’s new, simplified option will allow anyone, whether a worker, an employee of his or her own pet products business, or the owner of a home-based grooming or pet services business to use a flat, no-questions-asked deduction of $5 per square foot of the part of the residence used for business purposes, not to exceed 300 square feet, for a maximum deduction of $1,500.

In general, home office expenses are deductible if part of the home is used regularly and exclusively as (1) a principal place of business, (2) a place to meet or deal with customers or clients in the ordinary course of business, or (3) in the case of a separate structure not attached to the dwelling unit, in connection with the taxpayer’s trade or business. These requirements still apply under the new option.

The increasing number of people in the pet industry working at home or operating a business from their home, can now use the safe harbor option for home office expense deductions. In fact, as issues that might prompt an IRS examination will be resolved with the safe harbor’s formula, an additional side benefit of using the safe harbor is that claiming a home office deduction will likely be less of an audit flag. But is this safe harbor the most rewarding path?

Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees, remain fully deductible regardless of the path chosen. The tax write-off for the actual expenses of maintaining an office in the home, on the other hand, usually involves not one expense, but many. These deductions, which may include such items as a portion of utility bills, mortgage interest, repairs and depreciation, are totaled to determine an overall reportable deduction.

When it comes time to file the tax returns for the 2013 tax year, the nearly 3.4 million taxpayers who claimed deductions for the business use of their homes in 2010 (the last year when figures are available), will face the choice: use the safe harbor, deduct up to $1,500 and save the countless hours of recordkeeping, calculation, allocation and substantiation required to meet many of the tax law’s requirements for the home office expense deduction. Or reap possibly larger tax savings using the actual expenses of operating an office in the home and risk questions from the ever-vigilant IRS. <HOME>


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