Taxpayers who use their home for business may be eligible to claim a home office deduction. It allows qualifying taxpayers to deduct certain home expenses on their tax returns. This can reduce the amount of the taxpayer’s taxable income. Here are some things to help taxpayers understand the home office deduction and whether they can claim it:
1.The home office deduction is available to both homeowners and renters.
2.There are certain expenses taxpayers can deduct. They include mortgage interest, insurance, utilities, repairs, maintenance, depreciation, and rent.
3.Taxpayers must meet specific requirements to claim home expenses as a deduction. Even then, the deductible amount of these types of costs may be limited.
4.The term “home” for purposes of this deduction:
> Includes a house, apartment, condominium, mobile home, boat, or similar property.
>Also includes structures on the property. These are places like an unattached garage, studio, barn, or greenhouse.
>Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn, or similar business.
5.There are two basic requirements for the taxpayer’s home to qualify as a deduction:
>There must be the exclusive use of a portion of the home for conducting business regularly. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the industry.
>The home must be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at home, and there is no other location to perform these duties. Therefore, someone who runs business outside of their home and uses their home to conduct business may qualify for a home office deduction.
6.Expenses related to a separate structure not attached to the home will qualify for a home office deduction. It will be eligible only if the design is used exclusively and regularly for business.
7.Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction:
>The simplified option has a $5 square foot rate for the home’s business use. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.
>When using the standard method, deductions for a home office are based on the home’s percentage devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the share of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.
If you would like to discuss this tax planning opportunity and understand how you use your home regularly and exclusively for your business can reduce your tax bill, please call our office at your earliest convenience.