January 20, 2016

Home Office Tax Deductions for Business - Part Four of Four-Calculating the Deduction

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Business Use of Home Deduction- Part Four of Four-Calculating the Deduction

The business use of home deduction is often misunderstood and there are very specific requirements you must satisfy to qualify for the deduction. This article is part of a four part series starting with the basics, meeting the requirements, business use of home as an employee and ending with how to calculate the business use of home deduction. In this article we will focus on calculating the deduction.

Calculating Your Home Office Deduction

There are two ways to calculate the home office deduction; the traditional method and the optional simplified method. Note in either method, you cannot deduct more in any year than the profit you earn from your business. Any amounts you cannot deduct this year may carry forward to be deducted in future years when you have more profit.

Traditional method: The traditional method is based on the actual expenses you incur for your home. These expenses fall into two broad categories; direct and indirect. Direct expenses are expenses you incur directly for your home office– for example, painting your home office, carpeting it, or paying someone to clean it. The entire amount of a direct home office expense is deductible and should be tracked separately.

An indirect expense is a payment for something that benefits your entire home, including both the home office portion and your personal space. Most of your home office expenses will be indirect expenses, including:

Rent, if you rent your home or apartment;
Mortgage interest and property taxes if you own your home (but if you deduct these expenses as part of the home office deduction you may not also deduct them again as a personal itemized deduction on Schedule A);
Depreciation, if you own your home;
Utilities;
Homeowners association payments;
Security monitoring;
Insurance, and;
Home maintenance expenses for your entire home.

You can only deduct part of an indirect expense—the amount of your home office percentage. For example, if you’re a renter and use 20% of your home for your home office, you’ll be able to deduct 20% of your rent, utilities and other indirect expenses. The home office deduction is particularly valuable for renters because it permits them to deduct a portion of their rent; a substantial expense that is ordinarily not deductible at all.

Simplified method: To make the home office deduction easier to claim, the IRS has created an optional simplified method of calculating it: You deduct $5 for every square foot of your home office. Thus, all you need to do is measure the square footage of your home office. For example, if your home office is 200 square feet, you’ll get a $1,000 home office deduction. That’s all there is to it. You can only use this method if your home office is 300 square feet or less.

It is important that you calculate it both ways to arrive at the best outcome.

How the Having a Tax Deductible Home Office Can Increase Your Mileage Deduction

If you drive for your business, having a tax deductible home office can greatly increase your deduction for business mileage. This is because it can eliminate the IRS’s commuting rule. The IRS says that personal commuting—driving from home to your regular place of business (and back again)–is not deductible. For example, you cannot deduct the cost of driving from home to your regular outside office. If you have no regular place of business normally, the commuting rule prevents you from deducting the cost of driving from home to your meeting of the day and then driving back home again after your last meeting of the day.

However, if you have a home office that qualifies as a principal place of business, you can deduct the cost of any trips you make from home to another business location for that same business. Your home office will qualify as your principal place of business if it is the place where you earn most of your income or perform most of your business administrative or management tasks.

Business Use of Home Deduction- Part One of Four- The Basics

Business Use of Home Deduction- Part Two of Four- Meeting the Requirements

Business Use of Home Deduction- Part Three of Four - For An Employee

IRS Form 8814- What Is The "Kiddie Tax