Home office deduction benefits small business owners

If you use a part of your home for business, you could reduce your tax bill by deducting a portion of your rent or mortgage interests, utilities, insurance, and other home expense.  However, it’s important to understand the rules so that you don’t raise red flags with the IRS.  In this post, I will explain the rules for taking a home-office deduction and how to use it to save money.

In general, to qualify for this deduction, you must use a part of your home exclusively and regularly:  

  • As your main place of business.
  • As a place of business where you meet patients, clients, or customers in the normal course of business.
  • If it is a separate structure, you must use it for your business
  • A place where you keep inventory or samples.
  • Under certain circumstances, the structure where you provide daycare services.

Deduction Limit: 
You can deduct the home office expense as long as it does not create a loss.  You may carry the non-deductible balances to the next year. However, the deductions are subject to the same limitation rules. 

You may use either the simplified method or the regular method to claim your deduction.

Simplified method

If your home office is less than 300 square feet, you can use a flat rate of $5 per square foot for your home office area.  The maximum deduction is $1,500 (up to 300 square feet).  For example, if your home office is 200 square feet, you can take a maximum deduction of $1000.

Regular method

The regular method allows you to deduct both direct expense and a portion of indirect expense related to your home office. A direct expense is an expense that incurs directly to your home office.  Let’s say you pay someone to install window treatments and paint your home office. These expenses are the direct expense and 100% deductible.  An indirect expense, on the other hand, is the expense related to maintaining your home.  The deduction is based on the percentage of your home devoted to business use.  For example, if you rent your house and use 30% of your home for your business,  you will be able to deduct 30% of the rent, utilities, and other related expenses.

Deductible expenses for business use of a home include:

  • Real estate taxes  
  • Mortgage interest    
  • Rent
  • Casualty losses
  • Utilities
  • Insurance
  • Depreciation
  • Repairs and Maintenance

The home office deduction can be complicated, and the new tax law on the deductions sometimes can be hard to understand. Consult with us or your tax advisor if you’re unsure about how to proceed.


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