Taking the Home Office Deduction
Most small business owners start out with running their business from home. An advantage of running your business from home is that you may qualify for taking a tax deduction for the business use of your home. There are several qualifications that you must meet in order to qualify for this deduction.
The first requirement you must meet is that your “office space” or the room you use for your home office must be used regularly and exclusively for your business. When you use the space “exclusively” for business you are stating that this is the only thing you use the space for. It is important to keep in mind that if you use the space for anything else, such as an exercise or TV room, it does not meet the exclusively test. If it does not meet this test you cannot take the deduction.
However, there are a few exceptions to this rule. The exception you as a small business owner would find most valuable is storage. You will be allowed to take the home office deduction even if the space is used for both personal and business storage. If you use the space for storage for your business as well as storage for personal use you will be allowed to deduct the storage space as a home office deduction as long as you do not have another principal place of business. However, you will need to allocate the space between personal and business use.
Your home office will need to meet at least one of the following criteria in addition to the “exclusively” test in order to qualify for the deduction; your home is your principal or main place of business, it is a place where your customers meet with you in the normal course of your business, or it is a separate structure that is detached from your home that you use exclusively for business.
To figure out the percentage of your home expenses you can take as a deduction you take the total square footage for the area of your home you use exclusively for business, including any storage space you may use. Divide the total square footage of the area of your home used exclusively for business by the total square footage of your home. This number is the percentage of business use of your home. This is the figure you will use to calculate the amount of expenses you can deduction for your home office deduction,
You will need to divide all of the expenses incurred to maintain your home and home office for the year into two categories, direct and indirect. Direct expenses are specific expenses to your home office and are not related to any other portion of your home. All direct expenses are deductible. An example of a direct expense would be repairing a fixture that is only in the space you use for your home office. Most of the time you will only have indirect expenses. Indirect expenses are the expenses that will benefit your entire home such as utilities and property taxes. These expenses will be multiplied by the percentage of your home used for your home office and be allowed as a deduction.