Home Office Deduction
If you use your home or part of it for your business, you can deduct qualified expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. The home office deduction is available for homeowners and renters, as well as for any kind of structure including apartments and mobile homes. You also may take deductions if you rent out your residence. In order to qualify, this part of your home must be used exclusively and regularly as your principal place of business or a place to meet or deal with patients, clients or customers in the normal course of your trade or business. This portion also qualifies if it is a separate structure, not attached to your home. An exception for qualified daycare providers and the storage of business inventory or product samples requires regular use but not exclusive use of the property.
First, you must determine that your home is the principal place of your trade or business. This would be where your most important activities are performed and most of your time is spent. For example, if you have an office elsewhere where you keep regular hours but use a portion of your home occasionally for business, you cannot deduct the expenses for your home. Nor can you deduct business expenses for any part of your home that you use for both personal and business purposes, nor for portions of your home with random pieces of business equipment.
In order to figure out how much to deduct, figure the entire amount of expenses attributable solely to the portion of the home used in your business, and the percentage of your home used for business. This percentage may be figured by dividing the number of square feet used for business by the total square feet in your home, or by dividing the number of rooms used for business by the total number of rooms in your home (if they are all about the same size). Then apply this percentage to the total of each expense. The remaining amount of expenses such as real estate taxes and mortgage interest can be carried over to your Schedule A, if you itemize such deductions on your tax return. Qualified daycare providers who do not use any area exclusively for daycare can use as a percentage the ratio of the number of hours of daily use.
Your deduction cannot result in a business loss. Your home business expenses are limited and cannot be less than your income. However, some expenses such as mortgage interest, taxes, casualty losses that cannot be deducted because of the gross income limitation can be carried forward to the next year, and will be again subject to the deduction limits for that year.
Deductible expenses for the business use of your home include but are not limited to the business percentage of real estate taxes, deductible mortgage interest, rent, casualty losses, utilities, insurance, depreciation, and maintenance and repairs. In general, lawn care expenses are not deductible. If you do claim depreciation deductions, you should also be aware of depreciation recapture rules when you sell your assets at a later date.
Additional information can be found at www.irs.gov in Publication 587 (Business Use of Your Home), and Form 8829 (Expenses for Business Use of Your Home).