Whether you are self-employed or are an employee, you may be able to deduct certain expenses for the part of your home you use for business despite the general denial of business expense deductions for the home.
To deduct expenses for business use of the home, part of your home must be used as one of the following:
- Exclusively and regularly as your principal place of business for your trade or business
- Exclusively and regularly as a place where you meet and deal with your patients, clients, or customers in the normal course of your trade or business; or
- A separate structure used exclusively and regularly in connection with your trade or business that is not attached to your home
- On a regular basis for certain storage use
- For rental use
- As a daycare facility
When the exclusive-use requirement applies, you cannot deduct business expenses for any part of your home that you use for both personal and business purposes. For example, if you are an attorney and use the den of your home to write legal briefs and for personal purposes, you may not deduct any business use of your home expenses. Further, under the principal place of business test, you must determine that your home is the principal place of your trade or business after considering where your most important activities are performed and most of your time is spent, in order to deduct expenses for the business use of your home. Additionally, a portion of your home may qualify as your principal place of business if you use it for the administrative or management activities of your trade or business and you have no other fixed location where you conduct substantial administrative and management activities for that trade or business. An employee may only deduct business use of the home expenses when the business part of the home is used regularly and exclusively and for the employer’s convenience.
Deductions also may be taken for business storage purposes when the dwelling unit is the sole fixed location of the business or for regular use of a residence for the provision of day care services; exclusive use is not required in these cases.
Deductible expenses for business use of your home include the business portion of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs. You may not deduct expenses for lawn care in general or for painting a room not used for business.
Historically, the business use of home deduction has been computed by allocating the total expenses of the home to the percentage of the home used for business. Typically, this is done by floor space, but qualified daycare providers who do not use their home exclusively for business purposes must also figure the percentage based on the amount of time the applicable portion of the home is used for business.
While the deduction can still be computed in the same manner as before, many taxpayers may find a new optional safe harbor method less burdensome. Beginning in 2013, Revenue Procedure 2013-13 allows qualifying taxpayers to use a prescribed rate of $5 per square foot of the portion of the home used for business (up to a maximum of 300 square feet) to compute the business use of home deduction. Under this safe harbor method, depreciation is treated as zero and the deduction is claimed directly on Form 1040, Schedule C; Form 8829 is not used. Instead, two entries will be made directly on the Schedule C for the square footage of the home and square footage of the office which the taxpayer completes indicating their election to use the safe harbor option.
Regardless of the method used to compute the deduction, you may not deduct business expenses in excess of the gross income limitation. Under the regular method for computing the deduction, you may be able to carry forward some of these business expenses to the next year, subject to the gross income limitation for that year. However, under the safe harbor method there is no carryover provision, but you may elect in and out of the safe harbor method in any given year.
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