The Home Office tax deduction is a topic that people often have questions about. Find out today whether you qualify for a Home Office tax deduction and how you can calculate it.
The information presented in this episode is derived from IRS Publication 587.
When determining if you qualify for a home office tax deduction, the main question to ask yourself is, “Do I regularly use part of my home exclusively for conducting business?”
In order to qualify for a home office tax deduction, the IRS stipulates that you cannot use the space for both business and personal purposes, it must only be used for business purposes. If you have a home office, you can only use it for the business to qualify for the tax deduction. I personally have half of my basement that I use exclusively for our Amateur Naturalist Etsy shop. This portion of my basement houses all of our inventory and packaging supplies and it's where I process all of our orders. I don't use that portion of my basement for anything else but our Amateur Naturalist Etsy shop, so it meets the exclusivity test.
Let's say you are a food blogger, your kitchen does not qualify for a business use of your home tax deduction because you are using your kitchen for both personal and business activities. Now if you were a really wealthy food blogger and you had two kitchens in your house, and you used one exclusively to make and test your food blog recipes, then that second kitchen would qualify for a home office tax deduction.
For Brilliant Business Moms I do most of my work at the kitchen table or the family room couch. Because the kitchen table and couch are not exclusively used for the business, those areas of my house don't qualify for a tax deduction.
An area of your home that you use to story business inventory does count for the business use of your home tax deduction.
If you have an area that you use exclusively for your business, you must also use that area regularly in order to qualify for the business use of your home tax deduction. It can't be an area of your home that you only occasionally use for the business.
Principal Place of Business
The IRS also stipulates that your home must be your principal place of business in order to take the home office tax deduction. As bloggers and Etsy sellers this is almost always the case.
There are two methods you can choose from when calculating the amount of your tax deduction.
Actual Expenses Method
There are two methods to choose from for calculating your tax deduction. The first is called the Actual Expenses method. Calculate the square footage of the business use part of your home, lets say its a 10×10 area, or 100 square feet. Next determine the square footage of your entire house, lets assume you have a 1,000 square foot home. Lastly, calculate the percentage used for business purposes so for our example 100/1,000=10% of the home is used for business purposes.
A portion of the expenses involved in owning and maintaining your home can be counted as a business tax deduction. In the case of our example, 10% of Real Estate Taxes, Insurance, Mortgage Interest, Utilities, Depreciation, etc. can be counted as a home office tax deduction. These are called Indirect Expenses.
There can also be direct expenses. If you have to paint or repair the business portion of your house, then the entire cost to repair or maintain that area is a business expense, not just a portion. However if you are repairing or maintaining other parts of your home, those expenses are unrelated, and not even a portion can be taken as a business expense. For instance if you paint or repair your kitchen, you can't claim even a portion of that as a business expense, those costs are unrelated to the business portion of your home.
If you choose the Actual Expenses method, you'll need to complete Form 8829. I know this all seems confusing, but keep in mind that you'll be using a tax professional or tax software to complete your tax return. The tax program will walk you through these steps and complete this form for you. You just need to know to check that box that yes, you do qualify for a home office/business use of your home deduction.
There are limits on how much home office deduction you can take based on your business profits for the year. These limits are also calculated on Form 8829. The tax program will also adjust your Schedule A itemized deductions for the portion of certain items (such as Real Estate taxes) you take as a business deduction. The IRS is not going to let you double dip and count the same expenses twice.
The Easy Method
Yes, there really is an easy method, and it's actually easy!
Begin by calculating the square footage of the business use of your home. Lets use our 10×10 foot example, 100 square feet. Multiple the business square footage by $5 to determine your tax deduction. So in our example that's a $500 tax deduction. The maximum deduction for the easy method is 300 square feet or $1,500. Isn't that easy? All of this is right on Schedule C.
There is a gross income limitation on the easy method. If you don't have enough profit to cover the business use of your home tax deduction, you're not going to be able to take it in that year. So if you profit was only $100, you can only take up to $100 of a home office tax deduction.
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For more easy to understand information about tax deductions you may qualify for, check out The Blogger's Simple Guide to Taxes: A Guide to Saving Time and Money.
(Caveat, this information is meant to be a tax guide not a tax authority. Consider your own unique tax situation when you complete your tax return and consult with a tax professional who knows your unique situation.)