Home Office Deductions Under Business Tax Law
Many owners of small businesses use their homes for business purposes. This may allow them to deduct some of the expenses related to their home, such as rent or mortgage interest, as well as insurance, utilities, and real estate taxes. A business owner even may be able to deduct some costs related to repairs and improvements. The deduction does not need to be limited to a space that is specifically designed or labeled as an office. It can apply to any area in your home that is used for a business purpose. A home does not need to be a house or even an apartment. This term extends broadly under tax laws to cover nearly any type of residence.
You should be aware that you can claim a deduction for any ordinary and necessary business expenses incurred at home, even if no space in your home qualifies for the home office deduction. If you buy office supplies that you use at home, for example, they will qualify for the ordinary and necessary business expenses deduction. The home office deduction only applies to the costs of maintaining the home itself.
Requirements for Claiming the Home Office Deduction
First, you must be able to show that you regularly use an area of your home exclusively for your business. This does not mean that you work in this area of your home every day or for a certain number of hours each day. However, you must use this area of your home for work more than occasionally, probably on multiple days each week. If you use this area of your home for personal uses as well as business uses, you will not be able to meet the “exclusive” element of the requirement. You do not need to dedicate an entire room to business purposes, though. Using part of a room exclusively for business purposes can qualify that part of the room for a home office deduction. You must be able to show that the “business” is an actual profit-driven enterprise, rather than a hobby.
Exceptions to the exclusivity requirement apply to certain day care facilities and to business owners who store inventory or product samples in their home. They can claim the home office deduction even if they do not use the storage space exclusively for business purposes. They still need to regularly use the storage space for business purposes. This exception only applies if the business owner does not have any office location outside their home.
Moreover, a business owner usually must show that their home serves as their principal place of business. If they cannot make this showing, they still may qualify for a deduction if they can show that they meet clients or customers in their home or that they use another building on their property exclusively for business purposes.
Simplified Home Office Deduction
Calculating the amount of a home office deduction can be challenging. It involves keeping records that separate business use of the home from personal use, and a business owner will need to complete a specific form to claim the deduction. As a simpler alternative, a business owner can simply deduct $5 for each square foot of their home office space. The simplified deduction works only for offices that are no larger than 300 square feet, since it is capped at $1,500. A business owner should make sure that taking the regular deduction would not result in significantly greater savings before choosing to claim the simplified deduction instead.
Deductions for Repairs and Improvements
Homeowners usually cannot claim a deduction for repairs or improvements to a home, but there is an exception for business owners with a home office. The type of deduction would depend on whether the cost relates to a repair or an improvement. If the project involved making your home much better than it was, adapting it to a new use, or restoring it to its operating condition, this would be classified as an improvement. Any other types of projects would be classified as repairs. In other words, repairs are minor fixes for a specific problem, while improvements tend to change the character of the home more broadly. You can deduct the entire cost of a repair in a single year, while you would need to spread the deduction for the cost of an improvement as depreciation over multiple years.
Some repairs or improvements affect only the home office, while others affect the home more generally. Direct expenses are expenses that affect only the home office, and they are deductible in their entirety. Indirect expenses are expenses that affect the entire home. You would claim a deduction for the percentage of an indirect expense that corresponds to the percentage of your home that serves as a home office.
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