Running your business from home has several advantages. One is is that you can deduct certain items as an expense on your taxes for the year! Here, we will take a look at what the IRS considers to be a home office, which expenses can be deducted and which cannot, and then look at how to calculate the deduction.
The IRS says that in order to deduct expenses for business use of the home, you must use part of your home as one of the following:
- Exclusively and regularly as your place of business
- Exclusively and regularly as a place where you meet and deal with your patients, clients, or customers
- A separate structure used in connection with your business that is not attached to your home
- On a regular basis for storage of inventory or product samples
- For rental use
- As a daycare facility
Expenses you may deduct:
- business portion of real estate taxes
- mortgage interest
- casualty losses
- maintenance and repairs
Expenses you may not deduct:
- Anything outside of the office area (repairs & maintenace of other existing rooms, lawn care etc)
Two ways to calculate the deduction:
Regular: Allocating the total expenses of the home to the percentage of the home floor space used for business.
Example: Sarah ran her Etsy business out of her 2 bedroom, 1,200 square foot house from January – December 2016. She uses the second bedroom to store all of her materials and inventory, make the items she sells, and process all of the necesssary paperwork for her business. She uses this room only for her business. The room is 100 square feet. Her monthly rent is $1,400 (16,800/year). She can deduct $1,344 for her rent (100/1200 = .08 x 16,800). She would also deduct 8% of her other deductible expenses from above.
Simplified: Use a prescribed rate of $5 per square foot of the portion of the home used for business (up to a maximum of 300 square feet) to compute the business use of home deduction.
Example: Using Sarah from the above example, she can deduct $6,000 for all of her expenses for the year.
Info taken directly from IRS Topic 509 – Business Use of Home. For more detailed info, Publication 587 has more information on rules for the business use of your home, including how to determine whether your home office qualifies as your principal place of business.