The home office deduction can help small business owners save money on their taxes. Taxpayers may claim this deduction if they use a portion of their home exclusively, and on a regular basis, for any of the following:
As the taxpayer’s main place of business;
As a place of business where the taxpayer meets patients, clients or customers (the taxpayer must meet these people in the normal course of business);
If it is a separate structure that is not attached to the taxpayer’s home (the taxpayer must use this structure in connection with their business);
A place where the taxpayer stores inventory or samples (this place must be the sole, fixed location of their business); or
Under certain circumstances, the structure where the taxpayer provides day care services.
Note, you must file a Schedule C with your tax return to take the deduction.
Deductible expenses for business use of a home include:
Real estate taxes
Repairs and Maintenance
Note, certain expenses are limited to the net income of the business. These are known as allocable expenses, and include things such as utilities, insurance, and depreciation. While allocable expenses cannot create a business loss, they can be carried forward to the next year. If the taxpayer carries them forward, the expenses are subject to the same limitation rules.
Calculating the Deduction
There are two options for figuring and claiming the home office deduction.
Regular method: This method requires splitting the above home expenses between personal and business use. Self-employed taxpayers must file a Schedule C with their tax return, and then compute the deduction on IRS Form 8829.
Simplified method: The simplified method reduces the paperwork and recordkeeping for small businesses. The simplified method has a set rate that is capped at $1,500 per year, based on $5 a square foot for up to 300 square feet.
Note, special rules apply for the following business owners:
Daycare providers need to complete a special worksheet, which is found in IRS Publication 587.
Self-employed individuals can claim the deduction on Form 1040, Schedule C, Line 30.
Farmers can claim the deduction on Schedule F, Line 32.
Tax Tip 2019-156 #IRSTaxTip