Your Home Office
Entrepreneurs typically start their businesses from home and it is not only a great way to save money, but an allowable tax deduction. There are, however, several exceptions and requirements you need to know.
If you’re meeting clients at your home office to provide a product or service, you may qualify. Even if the office is not physically attached to the house, you can consider it a home office as long as it’s on your property and is a central facet of your business.
If your home office qualifies, several home expenses may be deductible because you’re using the area for business purposes. Some of these expenses include real estate taxes, mortgage interest, rent, casualty losses, repairs and maintenance.
Allocated Expenses
Some expenses are limited to the income of your business. These are commonly referred to as allocated expenses. These include costs like utilities, insurance, and depreciation of your home. If you carry these expenses forward, they will offset your future profits and will still be subject to the same limitation rules.
If you determine the home office deduction applies to you, there are two ways to claim it: the regular process and the simplified process. The regular process requires taking those home office expenses and dividing them between personal and business use. To do this, file form 1040, Schedule C, and determine the deduction on Form 8829.
Simplified Method
The simplified method reduces the paperwork and record keeping for small businesses. For this method, the set rate is capped at $1,500 per year based on $5 per square foot for up to 300 square feet, regardless of property value. There are special rules for certain businesses, including day care businesses, self-employed individuals, and farmers.
*It should be noted that accurate records and justification for this deduction are needed. A home office deduction is known to be a "red flag" for audits with the IRS.
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