If you're a small business owner who uses your home for business you may be eligible to claim the home office deduction, which allows you to deduct certain home expenses on your tax return. The benefit to this, of course, is that it can reduce the amount of your taxable income.
Here are seven tips to help you understand the home office deduction and determining whether you can claim the home office deduction on your tax return:
1. The home office deduction is available to both homeowners and renters.
2. There are certain expenses taxpayers can deduct including mortgage interest, insurance, utilities, repairs, maintenance, depreciation, and rent.
3. Taxpayers must meet specific requirements to claim home expenses as a deduction; however, the deductible amount of these types of expenses may be limited.
4. The term "home" for purposes of this deduction is defined as a house, apartment, condominium, mobile home, boat or similar property. It also includes structures on the property such as an unattached garage, studio, barn or greenhouse. It does not include any part of the taxpayer's property used exclusively as a hotel, motel, inn or similar business.
5. To qualify for the home office deduction your home must meet two basic requirements:
- There must be exclusive use of a portion of the home for conducting business on a regular basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.
- The home must be the taxpayer's principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home, but also uses their home to conduct business may still qualify for a home office deduction.
6. Expenses that relate to a separate structure not attached to the home qualify for a home office deduction only if the structure is used exclusively and regularly for business.
7. Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction:
Simplified option.This option uses a rate of $5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.
Regular method. Deductions for a home office are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.
Please call if you have questions about the home office deduction.