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How to Claim the Tax Deduction for Business Use of Your Home
By Nicole D
In our earlier post - Do You Run a Business Out of Your Home? You May Qualify for Tax Deductions - we outlined the requirements for claiming the business use of the home tax deduction. Here are the basics on how qualified businesses can file these deductions.
Because most home businesses are run from a portion of a home, not the entire structure, most of the deductible expenses are limited to the percentage of your home actually used for business.How to file
To find the business percentage, compare the size of the part of your home that you use for the business to your whole house. You can use part one of IRS Form 8829, Expenses for Business Use of Your Home, to figure the business percentage of your home business.
There are two popular methods for figuring out business percentages:
- Area method - Divide the area used for business by the total area of your home. If your home office is 150 square feet, and your home is 1500 square feet, your business percentage is 10%.
- Rooms method - Divide the total number of rooms by the number of rooms used for business. If your home has 8 rooms and 1 is used for business, your business percentage is 12.5%. It is important to note that this method should only be used if the rooms in your home are all nearly the same size.
If you're self-employed you will show business income and expenses on schedule C Form 1040, Profit or Loss from Business. You can figure out the expenses related to the business use of your home on Form 8829, and report the deductible amount on your schedule C.Deduction limits
You may be able to deduct all of your business expenses related to the use of your home if your gross business income equals or exceeds your expenses. If your gross business income is less than your total business expenses, your deduction amount may be limited.
In some cases, expenses that can not be deducted because of the limit may be used in later tax years. Talk to a small business accountant for more information on deduction limits.Filing tips
Position yourself to be prepared come filing time. Even if you have your taxes prepared by an accountant or tax attorney, you are the one that is ultimately responsible for filing and paying your taxes. Here are some tips to keep in mind as you prepare to file:
- Above all, keep detailed records that support the business use of your home, including receipts, invoices, cancelled checks, and other evidence of expenses for the deductions you claim. Read more about bookkeeping basics on Business.gov.
- When you have a business in your home you may be able to deduct a percentage of your home expenses such as insurance, utilities, and depreciation. These expenses are limited to the gross income from the business use of your home minus ordinary and necessary business expenses, and the business part of your mortgage interest, real estate taxes and casualty losses.
- If you report an amount for the business portion of the taxes and interest on schedule C, make sure you report only the personal portion on schedule A, itemized deductions. The amounts reported on schedule C and schedule A should be the total interest and taxes you paid for the year.
- If you sell a home that was used for business purposes, some special rules apply when you sell it at a profit, or as it is sometimes referred to, a gain. You pay tax on the part of the gain that's equal to what you claimed or could have claimed for depreciation over the years. Learn more about deducting capital expenses on Business.gov.
- Tax law is always changing - make sure you're up to date on the latest requirements with the Small Business and Self-Employed Tax Center from the IRS.