If you have just started a home based business, or, if you already have one, you may be able to deduct certain expenses relating to your home that would otherwise be non-deductible. There are two ways to calculate the deduction: the actual expense method and the simplified method. However, certain requirements must be met.

Actual Expense Method

You may claim a home office deduction for expenses that can be allocated to a specific area of your home that is used regularly and exclusively (1) as the principal place of your trade or business; (2) as a place of business that you use to meet or deal with patients, clients, or customers in the normal course of your trade or business; or (3) with respect to a separate structure next to your home in connection with your trade or business.

To qualify for the home office deduction, a specific area of your home must be used exclusively and regularly for business purposes. Generally, the exclusive use requirement is an all-or-nothing standard. The exclusive use test is met with respect to a portion of your home only if there is no use of that portion of the home at any time during the tax year other than for business. The exclusive-use test may be met if that portion of the home is used for more than one business purpose; however, it is not met if that portion of the home is used for any purpose other than a business purpose. The regular use test is met if you use that exclusive area in your home regularly for business purposes. This is generally a facts and circumstances test.

To calculate the home office deduction, you must allocate the expenses of operating your home between business and personal use. The determination of operating expenses that can be allocated to the business use of your home depends on whether the expense is direct, indirect or unrelated. It also depends on the percentage of your home used for business.

Direct expenses are amounts that are paid for the part of your home used for business. Painting or repairs that are done only in the area of the home used for business purposes qualify. Direct expenses are deductible in full as home office expenses.

Indirect expenses are expenses that are paid for operating the entire home. Insurance, utilities, and general repairs fit into this category. Indirect expenses are deductible as home office expenses based on the percentage of your home used for business.

Unrelated expenses are expenses that are paid for parts of your home not used in your business. Lawn care and painting of parts of the house not used for business are unrelated expenses and are not deductible.

Simplified Method

The Internal Revenue Service (IRS) recognizes that the calculation, allocation, and substantiation of the home office deduction can be complex and burdensome for small business owners. Accordingly, the IRS guidance provides an optional safe harbor method to reduce recording keeping and calculations. Under the safe-harbor method you can determine the allowable deduction for business use of a residence by multiplying a prescribed rate by the square footage of the portion of your residence that is used for business purposes.

You determine the amount of deductible expenses for a qualified business use of the home for the tax year under the safe-harbor method by multiplying the allowable square footage by the prescribed rate. The allowable square footage is the portion of a home used in a qualified business use of the home, but not to exceed 300 square feet.

The prescribed rate is $5, but IRS said it may update this rate from time to time as warranted. This safe-harbor method is an alternative to the calculation and allocation of expenses normally required. Accordingly, if you elect the safe-harbor for a tax year, you cannot deduct any actual expenses related to the qualified use of that home for that tax year. สร้างบ้าน

There may be reasons why you may not want to deduct home office expenses. For example, if you are contemplating selling your home and your gain would be otherwise excludable from income, the portion of gain representing recaptured depreciation relating to the home office will not be excludable from income. This is not true if you elect the safe harbor provision as depreciation is not deducted using that method.

You should be aware that if you use the actual expense method for computing your home office deduction, you must depreciate the business use of your house. The simplified method does not allow for depreciation.

In summary there are two methods of calculating your home office deduction. The actual expense method and the simplified method. The actual expense method requires more record keeping and calculation and requires you to depreciate your home. The simplified method is a safe harbor calculation and does not allow for depreciation.

As you can see, there are many things to consider in deducting home office expenses. Contact a qualified tax preparer to see if these rules apply to your facts and circumstances.

References: Rev. Proc. 2013-13; Code Sec. 280A

Disclaimer: This article is written to provide accurate and authoritative information in regard to the subject matter covered. The author is not hereby rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought.