Are you running a home-based business? Or, in other words, are you using part of your home for business purposes? If you just gave a ‘yes’ answer, then you can reduce your total tax expenses by deducting from it the expenses for the business use of your home.
You can enjoy this deduction whether you are a homeowner or tenant. And the deduction applies regardless of the type of home you live in. There are two methods for calculating the business use of your home (to know how much can be deducted from your tax):
- The simplified option
- The regular option
Table of Content
The simplified option
With effect from January 1, 2013, you can now compute the business use of your home using a simpler option than what obtained in the past. The previously used standard method involves some calculation, allocation, and substantiation requirements that you will find very complex and cumbersome. However, the simplified method makes things much easier by allowing you to multiply a prescribed rate by the allowable square footage of your home office to determine your actual tax-deductible expenses.
The regular method
Before the introduction of the simplified method explained above, the traditional method was to determine the actual expenses of their home office. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. If you are using this method your home office tax deductions will be based on the percentage of your home that you’re using for business. So, if you use one or two rooms for business purposes, you need to calculate the percentage of your home devoted to your business activities.
What are the requirements to claim home office tax deduction?
Your home office or the part of your home dedicated to business use must meet certain requirements before you can be allowed to claim tax deduction for it. Here are those requirements:
1. Exclusive and regular use
The part of your home you are using for business and want to claim tax deduction for must be exclusively used for business purposes. If you use it for personal or other purposes at times, it no longer qualifies as a home office, and you cannot take a tax deduction for it. In addition, your home office must be one that is used regularly. If you only use that part of your home on occasions, you cannot claim tax deduction for it.
2. Principal place of your business
For your home office to qualify for tax deduction, you must show that you use it as your principal place of business. If you have another location outside of your home dedicated to your business, but also use your home office substantially and regularly for business purposes, then you can qualify for a tax deduction.
However, if, on the other hand, you only use your home as a store or some other less important part of your business while using a location outside your home more substantially for business, then your home no longer qualifies for home office tax deduction.
However, you must bear in mind that your ‘home office’ doesn’t necessarily have to be a room or part of your main house. You can also deduct tax expenses for a freestanding structure—provided you use it regularly and exclusively for business. It could be some open space, a studio, your garage, or a barn. In fact, the structure does not even have to your principal place of business to qualify for a deduction.
For parts of your home such as room, your tax deduction expenses will be on the percentage of you home devoted to business use. This percentage is sometimes figured out by calculating the area of your home office and finding what percentage of the total area of your home it covers.
3. Employer’s benefit (for employees)
If you are an employee and use part of your home for business, you may qualify for a tax deduction for its business use. However, what you use the office for must be for the convenience and benefit of your employer. If you are using it for personal benefits while being formally attached to an employer, you cannot claim tax deduction for it.
How to claim home office expenses tax deduction
To claim your tax deduction on home office expenses, simply contact the IRS if you are in the U.S. or the appropriate interval revenue agency in your country (if you are outside the U.S.) Tell them that you want to claim tax deduction on your home office expenses. You will be directed on how to go about it. The procedure varies from country to country, so we cannot describe a specific one here.
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