Home Office Deductions and Home Business Tax

What is a Business Expense?

According to the IRS, a business expense is any expense that is made to, “carry on a trade or business. These expenses are usually deductible if the business is operated to make a profit.”

When Would I Qualify to Claim Business Expenses for Using My Home? 

To qualify to deduct expenses for business use of your home, you must use part of your home for one of the following situations: 

  • 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.

How Do I Calculate the Business Percentage of My Home for a Home Office Deduction?

There are two ways that you can calculate the business percentage of your home eligible for a tax deduction:

  • Regular method: Compare the size of the business designated portion of your home to your whole house.
  • Simplified method: Multiply $5 by the area of your home used for business purposes (up to 300 square feet). The optional deduction is capped at $1,500 per year.

What Method of Determination Does the IRS Allow for Calculating the Business Percentage of My Home?

The IRS allows for any reasonable method of determination when calculating the business percentage of your home. However, 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 IRS Publication 587-Business Use of Your Home for more details.

What If My 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. 

What Are General Tax Deductible Home Expenses?

General tax deductible home expenses include:

  • Real estate taxes
  • Qualified mortgage insurance premiums
  • Deductible mortgage interest
  • Casualty losses

What Home Business Tax Deductions Can I Claim on My Tax Return?

You can deduct the following home business expenses:

  • Depreciation
  • Insurance
  • Rent
  • Repairs
  • Security system
  • Utilities and services

What If I Am Renting My Place of Residence and Meet the Requirements for Business Use of My Home?

You can deduct part of the rent you pay on your tax return. 

May I Deduct Certain Business Furniture and Equipment Used in Your Home Office?

You may be eligible to deduct your furniture or equipment (such as a computer for personal use). The equipment must past the more-than-50% test in order to be eligible for a deduction.

What is the More-Than-50% Test?

You must use the equipment at least 50% of the time for business.

When Can I Deduct Property for Business Use?

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.

Where Do I Report Listed Property in My 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 IRS Publication 587-Business Use of Your Home.

Note: You cannot take any depreciation or section 179 deduction for listed property without adequate records.

What If I Am Using Property in My 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.

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.

What Other Factors Do I Need to Be Aware of If I Claim Deductions for the Business Use of Your Home?

Here are other things to consider when deducting expenses 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, 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. 

Can I Claim Tax Deductions for a Family 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.

Where Can I Find More Information About Claiming Tax Deductions for Home Business Expenses?

See additional information about using your home as a place of business.

What Other Tax Deductions Can I Claim on My Tax Return?

Learn about other tax deductions you may qualify to claim on your federal income tax return.