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In the past many have not claimed an "office in the home" as many viewed it as a lot of time and trouble and an invitation to an audit. In addition to being "ordinary and necessary," home office expense cannot create or increase a loss from the business activity, IRC 280A(5). The use must be regularly and exclusively: (1) as the principal place or business [IRC 280A(c)(1)(A), this can include using a portion of the residence regularly and exclusively for administrative and management for the trade or business, such as billing or scheduling, and if the taxpayer does not conduct substantial administrative or management activities at any other fixed location regardless if others also perform such functions at that location, IRC 280A(c)(1) flush language], (2) as a place where taxpayers regularly meet with patients, clients or customers in the normal course of business, [IRC 280A(c)(1)(B)]. (There are also special rules for inventory storage, free standing buildings and day care in the home.) If the taxpayer is an employee, then the use must be "for the convenience of the employer.

 IRC 280A, as reflected in IRS form 8829, created a long, detailed and involved way to compute the deduction. Rev. Proc. 2013-13, 2013-6 I.R.B. 475 (2/4/2013) provides an alternative "safe harbor" computation method. The use must still be "ordinary and necessary," "regularly and exclusively" for business and for an employee, "for the convenience of the employer. The safe harbor is limited to depreciable real estate under IRC 168 or MACRS property (no boats or motor homes).

The "safe harbor" works like this: (1) figure out the square footage which meets the above tests, limited to 300 square feet, and (2) multiply by $5.       

One still cannot create or increase a loss from the business. There can be no other office in the home deductions. And if not used, the excess cannot be carried to a subsequent used.

One can still claim allowable expenses for interest and mortgage expenses as an itemized deduction on Schedule A.

There is no depreciation recapture upon conversion to personal use or sale.

An example adopted from Rev. Proc. 2013-13, Example 1 with additional analysis:

 A, a sole proprietor uses a room in his residence regularly and exclusively to meet with customers in the normal course of his trade or business throughout 2013. A determines that the room is 350 square feet and has a cost basis of $10,000. A placed the room in service in January 2013. A depreciates the room under § 168 as nonresidential real property. During 2013, A earns $9,000 of gross income from the business and pays the following business expenses:

A also pays the following expenses related to his home in 2013:

         
For 2013, A elects the safe harbor method.  A determines the amount of his deduction for the qualified business use of his home is $1,500 (300 sq. ft. × $5.00). A deducts his mortgage interest ($10,000), and real property taxes ($3,000) as itemized deductions on his federal income tax return (Schedule A of Form 1040). A deducts his ordinary and necessary business expenses that are unrelated to the qualified business use of his home ($3,400) as trade or business expenses As provided in section 4.01(4) of this revenue procedure,.  A may not deduct any portion of the actual expenses related to the qualified business use of his home for 2013 (homeowners' insurance, utilities, and repairs). A may not deduct any depreciation for the room on his federal income tax return for 2013, and the depreciation deduction allowable for the room for 2013 is deemed to be zero. Accordingly, A’s adjusted depreciable basis in the room as of December 31, 2013, remains $10,000. The gross income limitation does not limit A’s deduction for the qualified business use of the home because the amount of the deduction, $1,500, does not exceed the gross income derived by A from the qualified business use of his home for the taxable year reduced by the business deductions  [or $5,600 ($9,000 gross income − $3,400 of business deductions)].

Assume that the house is 3,500 sq. ft., which would make the business use 10% (350/3,500), A is a lawyer and this is the spare bedroom which is  A's office in the home.  It is "ordinary and necessary" and used "regularly and exclusively" for A's law practice (either as a sole practitioner or "for the convenience of" ... A's    "employer").  Assume A is in a 15% Federal income tax bracket and normally itemizes deductions including mortgage interest and property taxes.  Assume based on past fears of inviting an audit A never claimed an office in the home.  Then based on a 15% federal income tax rate, self-employment taxes (SE) of 14.92%, and a Michigan tax rate of 4.25% the following alternative analysis exist.

                                                                        Tax Savings

                                                      Federal     SE Tax         MI          Total

I.  The "safe harbor" ($1,500)      $375.00      $224.40     $63.75     $663.15

II.  10% of all costs ($17,800)

      plus $256.40 of depreciation   $509.10      $304.65     $86.55     $950.29

III.  Use safe harbor and

       itemized deductions.  Increase

       federal itemized deductions

       by 10% of $10,000 and

       $3,000 or $1300                        $700.00          

       self-employment tax is same as

        using the "safe harbor" as is

        the Michigan tax                                          $224.10       $63.75    $988.15

Conclusion:  The safe harbor can not only simplify computations and avoid depreciation recapture, but for those who itemize deductions could result in considerable tax savings.   For employees, the net tax savings are essentially the Federal savings for employees (no Self Employment taxes and no impact on Michigan taxable income).  For those in higher Federal income tax brackets the savings are even higher.