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Home Office Deductions
September 10, 2019
You may qualify for a home deduction if you are a small business owner. This will help you in saving money on your taxes and it will benefit your bottom line. Today, we will discuss how you can avail these tax deductions.
What qualifies as a business?
Whether your endeavors qualify as a business depends on your circumstances. the more substantial the activities, in terms of time and effort invested and income generated, the more likely your endeavors to qualify as a business.
- Making money from your efforts is a prerequisite, but for purposes of this tax break, profit alone isn’t necessarily enough.
- If you use your home solely to take care of your investment portfolio, you can't claim home office deductions because your activities as an investor don't qualify as a business.
- Taxpayers who use a home office exclusively to actively manage several rental properties they own, though, may qualify for home office tax status—as property managers rather than investors.
Who is eligible for these deductions?
You can avail these deductions if you use a portion of your home exclusively and regularly for any of the following,
- As the main place of your business.
- As a place of business where you meet your clients, patients, customers. You must meet these people in the normal workflows of your business.
- You must use this structure in connection with your business in case it is a separate structure which is not attached to your home.
- If this is a place where you store samples or inventory then this place must be the sole, fixed location of your business.
- Under certain circumstances, the structure where you may provide daycare services.
What are deductible expenses for business use of a home?
The deductible expenses for using a home for business purposes are,
- Rent.
- Casualty losses.
- Real estate taxes.
- Mortgage interest.
- Depreciation.
- Repairs and Maintenance.
- Utilities.
- Insurance.
Some expenses are limited to the net income of the business. Such expenses are known as allocable expenses. These include expenses like insurance, utilities, and depreciation. A business loss can’t be created by the allocable expenses but these may be carried forward to the next year. These expenses are subjected to the same limitation rules in case you decide to carry them forward.
How can I calculate and claim the home office deductions?
There are two methods for calculating and claiming the tax deductions for the business use of your home.
- Regular method. In this method, you are required to divide the operating expenses of your home between the business and personal use.
- Simplified method. This method is often preferred for it reduces the record keeping and paperwork for small businesses. According to this method, there is a set rate of $5 per square foot of the area of a home under business use. This method allows a maximum deduction on up to 300 square feet.
Some Special Cases
There are some special rules for certain small business owners. These include,
- Self-employed individuals.
- Daycare providers.
- Farmers.
The Takeaway
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters and applies to all types of homes.
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