Business owners and employees can take a home office deduction on their tax returns.On a tax return, the deduction can reduce the total income.You have to use a specific area of your home for business.To qualify for the deduction, the taxpayer must work in that area regularly.You might be able to deduct a portion of your home's mortgage interest, utility costs, and other expenses if you qualify.
Step 1: The IRS defines a home office.
The IRS requires that you use a portion of your home for your main place of business in order to claim a home office deduction.It is possible to deal with customers, clients, or patients from that home location.The area used as your home office does not have to be furnished.It can be used as a laboratory, showroom or day-care center.The business portion of your home doesn't need to be attached to your living quarters for you to qualify for the deduction.You use part of the home to store your inventory if you run a retail business from home.Business owners in this situation can use a portion of the space for personal use and still qualify for the home office deduction.The portion of your home that you use for child care is not subject to the exclusive use rule.You can only deduct expenses incurred during the hours you care for children.
Step 2: Consider the location for your work.
A home office deduction can be claimed by someone who works for someone else.You can take the deduction if you work from home.If you work from home because your employer can't give you an office, you can take the home office deduction.For the convenience of the employer, you are working from home.If you telecommute because it's easier to work from home than it is to use the office, you can't claim the deduction.If you rent your home to the company you work for, you can't claim a home office deduction.
Step 3: The simplified option is a good one to use.
The IRS has a simplified method for calculating the dollar amount of your home office deduction.The method eliminates the need to track and file home expenses.You can deduct a flat $5 per square foot for your home office area.The square footage can be deducted up to 300 square feet.The amount is deducted from your tax return.You can't deduct a percentage of the actual mortgage interest, utilities, and repair costs if you choose the simplified method.You should use the normal home office deduction method if you think your costs are higher.
Step 4: How much space do you have in your home?
Home office deductions are limited by the percentage of the home used for business.You can't claim more than 25 percent of household expenses if your office occupies 25% of your home space.The mortgage interest, utilities, and repair costs that relate to your home add up to $15,000 a year.If 10% of your home's space was used for business, you would get a home office deduction.A direct expense, such as remodeling a bedroom into an office, is deductible if it benefits your business.An expense that benefits your entire house as well as your home business, such as putting a new roof on your house, is an "indirect" expense.The home office portion of your home is where the indirect expense is deductible.An expense that only benefits your living quarters is not deductible.
Step 5: If you own a home, deduct your deductible mortgage interest and real estate tax expenses.
You can deduct what you paid for rent.The amounts are restricted by how much of your home is used as a home office.Real estate taxes only include what you pay to the taxing authority.Assessments for public works projects that benefit you are not included.The home office deduction is only possible if your billing statement shows $3,000 in real estate taxes and a $1,000 assessment.Mortgage interest is deductible on both first and second mortgages.The total dollar amount of the deduction is limited.If you paid interest on a first and second mortgage, the entire $7,000 would count towards your home office deduction.If they don't qualify as home office deductions, mortgage interest and real estate taxes can be listed as itemized deductions.Taxpayers can deduct mortgage interest and taxes on schedule A.
Step 6: Go over the limitations of your home office deduction
It is not possible to deduct 100% of your home's depreciation as a home office expense.Home deduction limits are based on your business income.You can't deduct the cost of your home purchase.The amount used to depreciate the property is the cost of your home.If you choose to use a method that allows for depreciation expense, you will gradually expense the original cost of your home using the home office deduction.You will pay $300,000 for your home.You lose the entire value of your home over the course of 30 years.You can deduct 10% of your home as a home office deduction.Depreciation expense is a part of the home office deduction.Take your total income and divide it by the number of months.Home office deductions are limited to the amount of business income for the year.Carrying over excess deductions to the following year's taxes is possible if your business expenses exceeded your income.
Step 7: Take the deductible expenses into account when figuring out how much you can afford to run your home.
You can deduct expenses for insurance, utilities, and repairs regardless of whether you own or rent the home.The rules apply to both apartments and condominiums.The percentage of homeowner's insurance you can deduct depends on the size of your home office.You can deduct the business percentage of what you pay for utilities such as heat and electricity, as well as services like garbage collection, security and cleaning services.You can deduct the cost of a dedicated business line such as a fax line, as well as specific telephone charges related to your business, on your taxes.
Step 8: You might have casualty losses.
You can deduct casualty losses if your home office is damaged by a criminal act.You have to file an insurance claim.The portion of the loss that your insurance doesn't cover is what the taxpayer can deduct.If it hasn't been determined by the time you file your taxes, you can estimate the reimbursable amount.Assume that your casualty insurance reimbursement is $50,000 for the year.If your actual reimbursement is higher than the estimate, the difference is considered taxable income.If you were reimbursed $70,000 from the insurance company, $20,000 would be considered taxable income.If you want to correct the reimbursement amount, you can amend your tax return.You could change the amount of reimbursement from $50,000 to $70,000.The additional $20,000 in income would be eliminated.
Step 9: Your return should be filed.
The home office deduction should be reported on the correct tax form.Depending on your circumstances, you can report the deduction on schedule A or schedule C.If you're self-employed, you should include the home office deduction on your tax return.The schedule shows the profits and losses of a business.If you're claiming home office expenses as an employee, file schedule A.Schedule A can be used to list the expenses as itemized deductions on your tax return.Discuss home office deductions with an accountant.The deductions are scrutinized by the IRS.These deductions have the potential to be abused in the past.If you want to file your return correctly, you need to work with an accountant.