Business Use of your Home - The Misunderstood Deduction

If you own a home-based business, you may already be using part of your home as your office or work space. Most of the deductions related to the business use of your home are calculated from documents that are sent to you after the end of the tax year, such as year-end mortgage interest statements, which usually include total payments for insurance, as well as real estate taxes. We use estimates and select recurring expense categories to estimate your home office deduction. You can update your estimates at any time by clicking on Settings, My Business Setup.

The 'Business Use of your Home' tax deduction is one that was designed for sole proprietors, allowing them to deduct the portion of household expenses that is used by the business -- like rent or mortgage payments, utilities, and repairs and maintenance. You don't have to be a homeowner to take the deduction; renters can enjoy this deduction as well.

To take this deduction, the Business-Use portion of your home cannot be for casual and occasional business use. You must use that area of your home REGULARLY and EXCLUSIVELY for business. If you have an office at home, or even a place to store business products, the square footage of that area -- in relation to the total square footage of your home -- is the percentage used for all the home office deductions.

Direct repairs and maintenance

In addition to the percentage of overall home expenses, you are allowed to deduct 100% of the expenses that are directly related to the business use area. For instance, if you remodel an office or paint an area that is used exclusively for business, you can deduct 100% of those expenses.

Simplified Option - While taxpayers can still figure the deduction using the regular method, many taxpayers may find the optional safe harbor method less burdensome. Revenue Procedure 2013-13 allows qualifying taxpayers to 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. Under this safe harbor method, depreciation is treated as zero and the taxpayer claims the deduction directly on Form 1040, Schedule C. Instead of using Form 8829, the taxpayer indicates the taxpayer's election to use the safe harbor option by making two entries directly on the Schedule C for the square footage of the home and the square footage of the office. Deductions attributable to the home that are otherwise allowable without regard to business use (such as qualified residence interest, property taxes, and casualty losses) are allowed in full on Form 1040, Schedule A.

Note: There is no way to tell what your home office deductions will be until after the end of the year when you receive all of the applicable statement, which is in turn you give to your tax accountant. This is listed on Form 1098 reported on Schedule A or on Form 8829 for home office deductions.

Deductr only gives the anticipated home office deductions, a guesstimate. The calculations are based on the escrow payment which can and does change year to year. An escrow is a portion of the monthly mortgage payment kept by a lender for the borrower’s sake to cover property taxes, insurance, condo fees and other costs when they arise. It is over and above the interest and principle portion.

Consult your tax professional to see if this fits your circumstances. This is not to be taken as tax advice. Please refer to our End User License Agreement.

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