The cost of owning and maintaining a home can be very expensive. Fortunately, you may be able to deduct a portion of your home expenses if you use part of your home for business. Expenses related to the business use of your home may include mortgage interest, insurance, utilities, repairs, and depreciation. There are specific requirements that must be met in order to be eligible to deduct expenses related to the part of your home used for business.
To qualify to claim expenses for the business use of your home, you must meet both of the following tests:
- Your use of the business part of your home must be:
- For your business, and
- The business part of your home must be:
- Your principal place of business
- A place where you meet or deal with patients, clients, or customers in the normal course of business, or
- A separate structure used in connection with your business
Exclusive Use. A specific part of your home must be used only for your trade or business. This area can be a room in your home or other separately identifiable space. The space does not need to be marked off by a permanent partition. If you use this specific area for both personal and business purposes, you do not meet the requirements of the exclusive use test.
An exception to this exclusive use test exists for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility.
Regular Use. You must use a specific area of your home for business on a continuing basis to meet the regular use test. If your business use of the area is only occasional or incidental, you do not meet the regular use test.
Principal Place of Business. Some business owners may have more than one business location. To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be the principal place of business for that business. In order to qualify as your principal place of business for deducting expenses for its use, you must meet the following requirements:
- You use it exclusively and regularly for administrative or management activities of your business
- You have no other fixed location where you conduct substantial administrative or management activities of your business
If you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the above rules, determine your principal place of business based on the relative importance of the activities performed at each location. If the relative importance factor does not determine your principal place of business, consider the time spent at each location. If, after considering your business locations, you home cannot be identified as your principal place of business, you cannot deduct home office expenses.
Deduction Limit. Even after meeting the specific requirements explained above, your deduction may be limited. You can deduct all your business expenses related to the business use of your home if your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation). However, your deduction is limited if your gross income from the business use of your home is less than your total business expenses.
Use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. The form will walk you through the calculation of the deduction, however, a description is provided below:
The deductible portion of otherwise nondeductible expenses, such as insurance, utilities, and depreciation (with depreciation taken last) is limited to the gross income from the business use of your home minus the sum of the following:
- The business part of expenses you could deduct even if you did not use your home for business, such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040).
- The business expenses that relate to the business activity in the home, but not to the home itself. Examples of these expenses include business phone, supplies, and depreciation on equipment.
Your tax preparer can provide you with more information regarding the business use of your home on your income tax return. StrataTax, a San Diego consulting and tax services firm, is available year-round to assist you with income tax preparation and tax planning. Call us at (858) 225-7720 to setup your free initial consultation or visit us at www.StrataTax.com for more information.
StrataTax wants to hear from you and encourages comments. You are invited to share your opinions or ask questions related to this topic by visiting us at www.StrataTax.com/tools/blog. Also, please visit our Tools section (http://stratatax.com/tools) to explore our library of resources that offers tips and strategies on a wide range of tax and business related topics.
TAX ADVICE DISCLAIMER:
Please be advised that in order to ensure StrataTax’s compliance with the rules and standards required by the Internal Revenue Service (IRS), we are informing you that any tax advice contained in this communication, including attachments, is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or promoting, marketing or recommending this transaction or a tax related matter to another party.