What Is a Home Office Deduction
Home offices are very common. If you use one to run your business, you may be able to take certain deductions on your taxes. However, you need to meet certain eligibility criteria and may be subject to a limit on how much you can deduct. In order to claim a home office deduction, you need to meet at least one of the following conditions:
What Expenses Can You Deduct?
The IRS allows businesses to deduct expenses that are ordinary and necessary to their operation. It follows a similar methodology for home office deductions. But remember, you can only deduct business expenses and not personal expenses, so while you share the premises, you will have to account for business expenses separately. Most expenses incurred during the operation of your business may qualify for the home office deduction. Qualified expenses may include the business portion of your mortgage, insurance, depreciation, mortgage interest and maintenance.
Steps to Determine Your Home Office Deduction
There are two ways a business owner can claim the home office deduction — the regular method and the simplified option.
Regular Method for Home Office Deduction
Under the regular method, you’d compute your home office deduction by computing the percentage of the expenses that go towards business use. You could use IRS Form 8829 to make that calculation. There is a step by step process to determine how much you are able to deduct on your taxes for your home office. The following steps can help you determine the number:
Exception for Day Cares Using Regular Method
If you run a daycare facility and the lines of business and personal use of your home are a little fuzzy the IRS has an exception for you. You can determine your home office deduction by computing what percent of your home is used exclusively for business and what percent is used for business part-time and takes the sum of those figures to compute the deduction amount.
Simplified Option Method for Home Office Deduction
This method offers an option to business owners to compute their home office deduction by using a simple calculation, rather than the regular complicated one. Under this method, business owners can claim $5 deduction per square foot for the business use of their home, subject to a maximum of 300 sq. ft.
Example of Regular Home Office Deduction Calculation
The following is an example of how to use your income and expenses to determine your home office deduction allowed in a tax year. Your Gross Business Income is $10,000.Your total home office expenses are $12,000.You are therefore subject to a deduction limit because your expenses are more than your income. Your maximum allowed deduction is $2000, but you have $4000 in home office expenses that you still want to deduct. You can therefore only deduct up to the $2000 deduction limit and will have to carry over $2000 ($4000-$2000) to the next tax year.
