If you conduct business in a part of your home, you may be eligible for tax deductions. It doesn’t matter if you are self-employed or are an employee of another business, although you must use your home as one of the following:
- Exclusively on a regular basis, as the home must be the primary location of the business conducted
- As a place where you meet with clients, customers, or patients regularly as part of business operations
- As a building used in connection with your business that is not physically attached to the home
- On a regular basis for storage
- Rental use
- As a daycare facility
Deductions cannot be claimed on expenses incurred from parts of your home that are used for both personal and business reasons. The home office must be used exclusively for your business, and it’s required that it be the principal place in which you conduct your business. That means that you have to perform most business duties in that portion of your home, as well as spend the majority of your time conducting business in the home office in order to deduct the expenses.
For positions like a contractor, a home office can be the place where managerial and administrative activities are carried out, since the actual work doesn’t have a consistent location. Employees of other businesses are only able to deduct expenses incurred from a home office if most of their time is spent working from home, and in doing so, they are providing a convenience to their employer.
In order to deduct expenses for business storage, the location of the unit must be the only fixed location of the business. The same is true for home day care facilities, and the rule for exclusive use does not apply in these circumstances.
The types of home office expenses that are deductible include:
- Real estate taxes
- Mortgage interest
- Casualty losses
- Maintenance costs
Household expenses like lawn care, landscaping, painting, or other expenses incurred in areas of the home not used for business are not deductible.
In order to calculate the home business deduction, you have to figure out the percentage of the home’s square footage that is used for business and find the difference between the that and the total square footage. The safe harbor method for deduction can simplify the process. Taxpayers who are qualified to use this method can opt for a predetermined rate of $5 per square foot, with a maximum of 300 sq. feet. Using this method, depreciation is zero, and deductions are taken on a Schedule C directly. You only have to enter the totally square footage of the home and the footage of the office space. Doing so indicates the use of the safe harbor method.
Daycare providers have to calculate a percentage of time that the home is used as the business. Self-employed taxpayers can claim the deduction on a Schedule C, Profit of Loss from Business. No matter which option you choose to determine the deduction, you have to adhere to the gross income limits which determine the maximum amount of deduction. If you use the regular method, you might be able to carry over the excess expense to the next year, though this is not an option for those who use the safe harbor method.
Employees who want to deduct home business expenses must itemize deductions using a Schedule A when they file Form 1040. Farmers should claim such expenses on a Schedule F, Profit and Loss from Farming.