Deducting home office expenses for your home based business

Deducting home office expenses for your home based business 1

Most WAHMs operate from their home.  One of your biggest tax deductions may be your home office, so it’s important to learn what expenses you can deduct.

If your home office qualifies, you may be able to deduct part of your housing expenses on your tax return. Your home office qualifies if it is your principal place of business, and you use it regularly and exclusively for business.

To pass the ‘place of business’ test, your home office must be the principal place you conduct your business, or a place where you regularly meet clients or customers, or it must be a separate structure not attached to your home.  If you store inventory for your home-based business, that may also qualify you for the home office deduction.

Regular and exclusive use means that you spend at least 10-12 hours per week conducting business in your home office, and that you don’t use this room for other purposes. For example, if you use part of the room as a laundry room or children’s play room, you may not qualify for the home office deduction (unless you segregate the separate areas and the ‘business area’ is used only for business purposes).

Expenses that can be deducted include mortgage interest, real estate taxes, utilities, insurance, repairs, security, and depreciation. Only the business use percentage of these expenses can be deducted. The business use percentage is calculated by dividing the square footage of the office space by the square footage of the home, or by dividing the number of rooms you use for business by the number of rooms in your home.

Direct expenses, such as repairs made solely to the room used for your home office, or telephone lines installed just for business use, can be deducted in full. Indirect expenses, such as mortgage interest and real estate taxes should be allocated between the home office deduction and your itemized deductions to get the greatest tax benefit.

Caution: Your business must earn a profit to take the home office deduction. If your home office expenses are larger than your business profits, you must carry the excess expenses forward to future years.