The IRS advises small businesses that a home office deduction can help save money on taxes.
Taxpayers can take this deduction when they file their taxes if they use a portion of their home—exclusively, and on a regular basis—to run their business.
To qualify, a small business owner must use the home:
- As the taxpayer's main place of business
- As a place of business where the taxpayer meets patients, clients, or customers in the normal course of business
- If it is a separate structure not attached to the taxpayer's home, the taxpayer must use this structure in connection with their business
- As a place where the taxpayer stores inventory or samples and is the sole, fixed location of their business
- Under certain circumstances, the structure where the taxpayer provides day care services
Deductible expenses for business use of a home include real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, repairs, and maintenance.
Certain expenses are limited to the net income of the business.
These are known as allocable expenses and include such things as utilities, insurance, and depreciation.
While allocable expenses cannot create a business loss, they can be carried forward to the next year.
If the taxpayer carries them forward, the expenses are subject to the same limitation rules.
There are two options for figuring and claiming the home office deduction:
- The regular method requires dividing the expenses of operating the home between personal and business use. Self-employed taxpayers file Form 1040, Schedule C, and compute this deduction on Form 8829.
- The simplified method reduces paperwork and recordkeeping for small businesses. The simplified method has a set rate capped at $1,500 per year, based on $5 a square foot for up to 300 square feet.
The IRS advises of special rules for certain business owners.
- Daycare providers must complete a special worksheet.
- Self-employed people use Form 1040, Schedule C, Line 30 to claim a deduction.
- Farmers claim the home office deduction on Schedule F, Line 32.
Visit the IRS website for more information.