Home Office Deduction and Home Business Tax
To qualify to deduct expenses for business use of your home, you must use part of your home:
- Primarily, and on a regular basis, as your main place of business,
- As the place where you meet or deal with patients, clients or customers in the normal course of your trade or business on a regular basis,
- As the primary place of storage for inventory or business equipment,
- For rental use, or
- As a childcare or other daycare facility.
To calculate the business percentage of your home eligible for a tax deduction, you must compare the size of the business designated portion of your home to your whole house. The IRS allows for any reasonable method of determination when calculating the business percentage of your home.
You cannot make deductions on the business designated portion of your home for parts of the year that business area was not in use.
The deduction limit for the business use of your home is dependent on the gross income of the business primarily used in your home. See Publication 587 -Business Use of Your Home for more details.
If your calculated deductions exceed the yearly limit, you may carryover the deductions to the next year.
In most cases, you cannot deduct expenses that are related to tax-exempt allowances
General tax deductible home expenses include:
- Real estate taxes.
- Qualified mortgage insurance premiums.
- Deductible mortgage interest.
- Casualty losses.
Home business deductions:
- Security system
- Utilities and services
If you are renting your place of residence and meet the requirements for business use of your home, you can deduct part of the rent you pay.
You may be eligible to deduct certain business furniture and equipment used in your home office.
If you purchase equipment, such as a computer, for personal use, that equipment must past the more-than-50% test in order to be eligible for a deduction. You must use the equipment at least 50% of the time for business.
You may deduct property that meets the following two requirements:
- Is used for the convenience of your employer and
- Is a required condition of your employment.
If you use listed property in your business, you must file Form 4562 to claim a depreciation or section 179 deduction.
There are specific rules for deducting the operating expenses of a daycare facility out of your home. For further information please refer to Publication 587 - Business Use of Your Home.
Note: you cannot take any depreciation or section 179 deduction for listed property without adequate records.
If you use property in your home business that was previously designated for personal use you will have to use a separate method for determining depreciation. You must first determine (1) the adjusted basis of the property on the date of change and (2) the fair market value of the property on the date of change.
According to the IRS, a business expense is any expense, “carry on a trade or business. These expenses are usually deductible if the business is operated to make a profit.”
Deduct business expenses not for the use of your home, including, but not limited to, dues, salaries, supplies, certain telephone expenses, etc.
Tax tip: these expenses are not for the use of your home, so they are not subject to the deduction limit for business use of the home expenses.
Things to be aware of if you claim deductions for the business use of your home:
You may exclude up to $250,000 in gain ($500,000 for certain married couples filing jointly) if you sell or exchange your home and meet the ownership and use tests. If you sell or exchange your home, you cannot exclude the part of your home used for business.
To meet the test, you must have owned the home for at least two years and lived in the home for two years as a five year residence within a five year period ending on the date of sale.
If you used part of that home for business however, you cannot exclude the part of the gain equal to any depreciation after May 6, 1997. You must also adjust the basis of your home for any depreciation that was allowable for its business use, EVEN IF YOU DID NOT CLAIM IT.
See additional information about using your home as a place of business.
Whether or not your business is home-based, there are certain tax advantages to employing one (or more) of your children. If you operate a sole proprietorship (or partnership with the other parent of the child) and as long as your child is under the age of 18, payments for their services are not subject to social security or Medicare tax withholding. If your child is under the age of 21, payments are not subject to FUTA (Federal Unemployment Tax Act) tax withholding.
See what other tax deductions you may qualify for.