The at-home business has become really popular over the years. It offers people an opportunity to generate an extra source of income right from home. By taking advantage of some home business deductions, you could significantly lower your year-end income tax bill when you file your taxes.
Like any business, the home business has its expenses, but many of them you may have paid before the business was started. Things like rent or mortgage, internet or a phone line are an everyday occurrence in any home budget. The IRS draws a fine line between personal and business expenses when it comes to a home business. But some of those personal expenses may still qualify as home business deductions.
What’s Your Business Percentage?
If you qualify for the home business deductions, your first step is finding out your home business percentage. You’ll then use this percentage to figure out the business part of those normal home expenses. The IRS uses two examples to finding out your business percentage:
- Divide the area (length multiplied by the width) used for business by the total area of your home, or
- If the rooms in your home are all about the same size, divide the number of rooms used for business by the total rooms in your home.
I’d lean toward the more accurate example. Just picture an IRS agent auditing you with a tape measure.
If, for example, your office is 200 sq ft and your home is 1,000 sq ft, your business percentage would be 20% (200 divided by 1000). You would then use this 20% business percentage in figuring out your home business deductions.
The Simplified Option
Starting in 2013, the IRS offers a simplified option of figuring out your business deduction. The new, simple option allows for a standard deduction of $5 per square foot up to a maximum of 300 square feet. So, a 200 sq ft office would give you a $1,000 deduction.
Keep in mind, this simplified option is meant to make the process easier on you. It might not offer the best deduction possible.
Possible Home Business Deductions
The home business deductions you may be missing out on are those that qualify as both a personal and business expense. There are several that fall into both categories that the IRS has qualified. If any pertain to you, use your business percentage to figure out your business portion of these expenses:
- Real Estate Taxes – Multiply your real estate taxes paid by your business percentage to find your home business deduction.
- Qualified Mortgage Insurance Premiums – Premiums on a second mortgage can be included. Multiply your premiums by your business percentage for the deduction.
- Deductible Mortgage Interest – Interest on a second mortgage can be included. Multiply this interest by the percentage of your home used for business for the deduction amount.
- Casualty Losses – If the casualty loss only affected the portion of your home used for business, the entire loss can be used as a deduction. If the casualty loss affected both your personal and business portions of the home, use your business percentage to figure your deduction.
- Insurance – You can deduct the insurance cost for the business portion of the home. But only for the premiums covering a given tax year.
- Rent – If you pay rent, the business percentage portion is deductible.
- Repairs – The cost of repairs that relate to your business only are 100% deductible – like painting your home office walls. The cost of repairs that relate to both your home and business, use your business percentage for the business portion of those expenses. Things like fixing a furnace or repairing a roof.
- Security System – The security system protects your home and business. The business portion of these costs are deductible.
- Utilities and Services – Includes gas, electric, water and waste, cleaning services, internet, use your business percentage to find the home business deductions. For telephones, however, the first phone line is non deductible. The cost of any business phone calls or a second business only phone line are entirely deductible.
When considering these possible home business deductions, though it’s an easy way to lower your tax obligations, make sure the deductions are justified. In the event that you are audited, you’ll have to prove the business portion of these expenses. If you don’t think you can prove or just aren’t sure, it’s best not to include the deduction. Keep thorough records of all your business related expenses, including those that fit into your personal and business costs.
Not sure if your home business qualifies, check out the IRS website for home office deduction requirements. With anything tax related, if you have any questions or concerns consult with a tax professional, preferably one with small business experience.