This is part of the Home Office series.
Resources:
Why YOU Should Care:
Using part of your home for business may enable you to deduct certain expenses such as:
- Real estate taxes.
- Qualified mortgage insurance premiums.
- Deductible mortgage interest.
- Casualty losses.
- Depreciation
- Insurance.
- Rent paid for the use of property you do not own but use in your trade or business.
- Repairs.
- Security system.
- Utilities and services.
These expenses can be deducted to the extent your home is used as an office space. Generally, these deductions are based on the percentage of your home devoted to business use (called the “business percentage”).
Calculating the Business Percentage
The deduction is dependent on the “business percentage” of your home. This is the ratio of the part of your home used for business purposes to your entire home. This can be calculated using any reasonable method, the most common methods being:
- Dividing the square footage of the business portion of your home by the total square footage of your home.
- Dividing the number of rooms used for business by the total number of rooms in your home (assuming all rooms are approximately the same size).
Partial-Year Use
This is especially relevant for those who started a business on any day other than January 1st of the given year. While you cannot deduct expenses incurred during any part of the year that your space wasn’t used as a home office, you can apportion your expenses over the part of the year during which your home was used as an office.
For example, let’s say you started a business on April 1, 2012, and used your home office regularly and exclusively for your business for the remainder of the year. You can apportion 275/366 – remember, 2012 was a Leap Year so the year is 366 days long! – or 75.14% of your total annual expenses.
Deduction Limitation
Your deduction is limited to the gross income you derive from your home office.
If your gross business income is greater than your total business expenses, you can deduct all your business expenses.
If your gross business income is less than your total business expenses, there’s need for further analysis. You may be limited on the amount of the deduction you can claim this year. Don’t worry, you can carry the excess over to the next year (to the extent they fall below the next year’s deduction limitation).
How to Claim the Deduction
Use Form 8829 to calculate the deduction. This form must be attached to your Form 1040 Schedule C for the year in question. The total deduction amount from Form 8829, Line 35 should be carried to Line 30 of Form 1040, Schedule C.
