Small business owners who use part of their home to run their business are entitled to deduct certain expenses on their tax returns. However, certain rules still apply when it comes to this home office deduction.
According to the IRS, there are two basic requirements that determine if your home qualifies for the deduction:
The regular and exclusive use requirement means you must regularly use part of your home exclusively for conducting business. If you run your business out of an extra bedroom or dedicated office space in your house, you can take the home office deduction for that space. If you work from your dining room table during the day and use the room for its intended purpose the rest of the time, you do not meet the regular and exclusive use rule and are not eligible for the deduction.
The principal place of your business requirement means you must show that you use your home as your principal place of business, including as a place to meet with customers, clients or patients in the normal course of your business. Even if you conduct business at a location outside of your home (meeting with clients, performing services, etc.), but also use your home substantially and regularly to conduct business, you can deduct your expenses for the part of your home used exclusively and regularly for business.
It’s important to note that you can also deduct expenses for a separate free-standing structure at your home if it is used exclusively and regularly for your business. This includes a studio, barn or garage used for business purposes. This structure does not have to be your principal place of business or the only place where you do business.
One additional note: If you are an employee who works from home, you may qualify for the home office deduction if you meet the requirements outlined above and those below:
- Your business use must be for the convenience of your employer
- You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.
The IRS stipulates that if the use of your the home office is merely appropriate and helpful, you cannot take the deduction. IRS Publication 587 outlines the business use of your home, including use by daycare providers.
The home office deduction is based on the percentage of your home devoted to business use. It is calculated using the total square footage of your home and the total square footage of the space you use for your business. Use IRS Form 8829 to complete your calculations.
Only certain expenses apply to the home office deduction. They include rent, deductible mortgage interest, real estate taxes, utilities, insurance, repairs and maintenance to your office space and depreciation of your home. Use Schedule C Form 1040 to report income and expenses and the deductible amount for the business use of your home.
Your deductions for certain expenses will be limited if your business’s gross income is less than your total business expenses.
As always, if you have questions or need additional guidance on the home office deduction, talk with your tax professional.
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