Home Office Deductions
If you're self-employed and use part of your home for your business, you can deduct home office business expenses against your self-employment income. The deduction applies to all types of homes and is available if to you if you are a homeowner or renter. A business expense is any expense made when running a business or trade. You can deduct the expenses if the main purpose of the business is to make a profit.
The easiest and most accurate way to find out if you can deduct the expenses from your home office is to start a free tax return on eFile.com. Based on your answers to the tax questions, we will determine whether or not you can deduct your home office expenses and we will calculate that deduction for you and report it on your tax return. Read on if you need more information about home office deductions.
In order to claim 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.
Home Office Deduction Calculation
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.
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. If the calculated deductions exceed the yearly limit, you can carryover the deductions to the next year. In most cases, you cannot deduct expenses that are related to tax-exempt allowances.
Tax Deductible Home Expenses
General tax deductible home expenses you can claim on your 2018 return include:
- Real estate taxes
- Qualified mortgage insurance premiums
- Deductible mortgage interest
- Casualty losses
- Security system
- Utilities and services
- If you are renting your home for business purposes and you meet the requirments for Business Use of Your Home, you can deduct part of the rent you pay on your tax return.
- You may be eligible to deduct your furniture or equipment (such as a computer for personal use) used in your home office. The equipment must past the more-than-50% test in order to be eligible for a deduction. You meet the more-than-50% test if you use the equipment at least 50% of the time for your business.
Property for Business Use
You may deduct property for business use that meets the following two requirements:
- Is used for the convenience of your employer and
- Is a required condition of your employment.
To report listed property for 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 IRS 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 are using 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:
- The adjusted basis of the property on the date of change and
- 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:
- certain telephone expenses
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.
Other Factors or 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. 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.
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.