Many self-employed individuals and small business owners use part of their home to conduct business. Just as a business with an offsite office is allowed to deduct operating expenses related to such office as a business expense, IRS allows a taxpayer, who uses a portion of his/her home regularly and exclusively for business purposes, to deduct a portion of operating expenses and depreciation of the home as a business expense. This home office deduction is available for homeowners and renters, and applies to all types of homes.
There are two basic requirements for your home to qualify as a deduction:
- You must regularly use part of your home exclusively for conducting business. For example, if you use your basement to run your business, you can take a home office deduction for that basement.
- You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business.
If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. You must meet the requirements discussed above plus:
- Your business use must be for the convenience of your employer, and
- You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.
If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.
Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.
Starting 2013, IRS has developed a new simplified option to calculate the home office deduction amount. It allows a deduction of $5 per square foot for maximum 300 square feet in home. This $5 amount takes the place of utilities, cleaning, repairs, depreciation, and any other expenses related to business use of the home, deducted against the business income. Mortgage interest, property taxes, and casualty losses are still allowed as itemized deductions on Schedule A, but are not allocated against business income.
Work with your CPA to find out whether your use of your home qualifies for home office deduction, how to determine the deduction amount, and how to claim it.