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What is a Home Office Deduction and Can I Apply It to My Business Taxes?


How is a Home Office Deduction Applied to Business Taxes? 

Are you a small business owner who often uses your home office routinely and exclusively for your business operations? If so, you may be eligible for home office tax deductions.  Besides helping you save money on your taxes; this provision can also boost your venture's bottom line.

For you to claim these deductions, your home must be classified as a house, apartment, mobile home, condominium, boat, studio, unattached garage, or other structure a taxpayer owns or leases for use as a "main place of business."

Home Office Tax Deductions—Basic Qualifications for a Home

Based on the required qualifications, the home should be a location where you meet your clients or customers in your ordinary course of doing business or a fixed place to store your inventory or samples. Furthermore, the home must also comply with the following primary conditions:

  • Exclusive use of a section of your home to conduct business functions regularly. As an illustration, if you're a taxpayer who habitually and preferentially uses space in your home to run your business, you're eligible to take a home office deduction exclusively for that extra room.
  • As a taxpayer, the residence must be your principal place of conducting business or a place where you run administrative or managerial duties in the absence of an alternative base for these functions. In the same context, if you’re a taxpayer who carries out business outside of your home and still pays bills or caters to administrative responsibilities from your premises, you’re still entitled to home office deductions.

A taxpayer who meets these requirements can claim deductions for specified expenses they pay for in the process of managing their homes. These deductible expenses include:

  • Mortgage interest
  • Real estate taxes
  • Insurance
  • Depreciation and rent
  • Utilities
  • Casualty losses
  • Repairs and maintenance

As a qualified taxpayer, you must understand the amount of the allowable tax deduction that may be subject to the net income of your business. Specific expenses (known as allocable expenses) hinge on the net income of your business.

These include utilities, insurance, and depreciation. Whereas these allocable expenses can't bring about a business loss, most business tax professionals may advise you to carry them forward to the subsequent year when they'd still be subject to similar loss limitation rules.

How to Apply as a Tax Deduction 

A CPA firm may present two options to help a taxpayer claim a home office tax deduction:

  • Regular Method—this strategy requires allocation of the listed expenses involved in operating your home proportionately between personal plus business use. Apart from assisting a self-employed taxpayer in filing Form 1040, Schedule C, a CPA firm can also help you calculate this home office deduction on Form 8829.
  • Simplified Method—a business advisory may recommend the simplified method option because it considerably helps reduce the paperwork and recordkeeping demands for small businesses. This approach typically considers a set rate—capped at $1,500 per annum, based on $5 per square foot for a maximum of 300 square feet.

For a taxpayer to use the regular Method to compute the home office deduction, he/she must ensure they keep diligent records and allocate these operational expenses among personal and business use.

On the other hand, the Simplified Method allows the taxpayer to apply a standard home office deduction based on $5 per square foot for the area they use exclusively and routinely for work purposes. This area must be within the 300 square feet of space limits.  

However, when you apply the Simplified Method, you'll lose your qualification for a depreciation tax deduction when you use your home for business. Likewise, you forego the benefit of carrying forward any amount of the deductions that are more than the gross revenue limitation.

Get in Touch with BAAP CPA to Learn More about Home Office Deductions

Are you looking for a first-rate business advisory team in Clearwater, Largo, and the entire Tampa Bay Area for your business or medical practice to score a higher, post-tax net worth?

As a strategic accounting and business consulting team, BAAP C.P.A partners with individuals and businesses to find multiple operational solutions. Besides focusing on helping you save considerable costs in your operating expenses, our business tax services also support businesses in managing their personnel, thereby boosting your expansion goals and financing options.

Call us at (727) 530 - 0036 today to find out how you can claim these deductions and to schedule a no-cost consultation. 

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