Many of us have a home office where we conduct our business or utilize part of our home for business purposes; however, you may not know this can conjure up tax savings. To qualify you must use part of your home exclusively and regularly as your principal place of business. According to the IRS, exclusively is defined as use of a specific area of your home only for your trade or business. You do not qualify for the deduction if you use the area for both business and material personal use purposes.
Upon determining that you qualify for the deduction, you must choose a method to determine the amount of your deduction. There are two methods, the simplified method and the actual expense method to compute the business use of home tax deduction. Utilizing the simplified method, you multiply the square footage by the prescribed rate. The allowable square footage is the portion of your home attributable to the business use of your home, but cannot exceed 300 square feet and the prescribed rate is $5.00.
For example, Suzzy Jean uses 65 square feet of the home exclusively and regularly for her designer jean company. Her tax deduction for business use of home would be $325 (65 square feet X $5 = $325).
If you elect to use the simplified method you cannot deduct any of the actual expenses or depreciation related to the business use of your home.
If you elect to claim the deduction based on your actual expenses you may deduct, in full, any expenditure that is directly related to the business use portion of your home. For example, painting or repairs in the area used for business. You may also deduct the indirect expenses of keeping up your home such as rent, mortgage interest, insurance, taxes, utilities, repairs and general maintenance. These indirect expenses must be deducted based on the percentage of your home used for business. For example, if your home office space is 200 square feet and the entire home is 2,000 square feet then you may deduct 10% of your total indirect expenses.
It is important to note that you may not deduct business expenses in excess of the gross income limitation (your net income from the business). Under the actual expense method, you may be able to carry forward some of these business expenses to the next year that were subject to the gross income limitation. Under the simplified method there is no carryover provision; however, you may elect in and out of the simplified method in any given year.
This is a mere summary of how to claim a deduction for business use of your home; however, there are many exceptions and unique situations. Please contact your tax adviser with any inquires you may have regarding business use of your home or other tax information.