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How to Claim the Tax Deduction for Business Use of Your Home

by NicoleD, Former Moderator

  • Created: November 20, 2009, 11:23 am
  • Updated: February 10, 2011, 6:40 pm
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5 comments

In our earlier post - Do You Run a Business Out of Your Home? You May Qualify for Tax Deductions - we outlined the requirements for claiming the business use of the home tax deduction. Here are the basics on how qualified businesses can file these deductions.

Because most home businesses are run from a portion of a home, not the entire structure, most of the deductible expenses are limited to the percentage of your home actually used for business.

How to file

To find the business percentage, compare the size of the part of your home that you use for the business to your whole house. You can use part one of IRS Form 8829, Expenses for Business Use of Your Home, to figure the business percentage of your home business.

There are two popular methods for figuring out business percentages:

  • Area method - Divide the area used for business by the total area of your home. If your home office is 150 square feet, and your home is 1500 square feet, your business percentage is 10%.
  • Rooms method - Divide the total number of rooms by the number of rooms used for business. If your home has 8 rooms and 1 is used for business, your business percentage is 12.5%. It is important to note that this method should only be used if the rooms in your home are all nearly the same size.

If you're self-employed you will show business income and expenses on schedule C Form 1040, Profit or Loss from Business. You can figure out the expenses related to the business use of your home on Form 8829, and report the deductible amount on your schedule C.


Deduction limits

You may be able to deduct all of your business expenses related to the use of your home if your gross business income equals or exceeds your expenses. If your gross business income is less than your total business expenses, your deduction amount may be limited.

In some cases, expenses that can not be deducted because of the limit may be used in later tax years. Talk to a small business accountant for more information on deduction limits.

Filing tips

Position yourself to be prepared come filing time. Even if you have your taxes prepared by an accountant or tax attorney, you are the one that is ultimately responsible for filing and paying your taxes. Here are some tips to keep in mind as you prepare to file:

  • Above all, keep detailed records that support the business use of your home, including receipts, invoices, cancelled checks, and other evidence of expenses for the deductions you claim. Read more about bookkeeping basics on Business.gov.
  • When you have a business in your home you may be able to deduct a percentage of your home expenses such as insurance, utilities, and depreciation. These expenses are limited to the gross income from the business use of your home minus ordinary and necessary business expenses, and the business part of your mortgage interest, real estate taxes and casualty losses.
  • If you report an amount for the business portion of the taxes and interest on schedule C, make sure you report only the personal portion on schedule A, itemized deductions. The amounts reported on schedule C and schedule A should be the total interest and taxes you paid for the year.
  • If you sell a home that was used for business purposes, some special rules apply when you sell it at a profit, or as it is sometimes referred to, a gain. You pay tax on the part of the gain that's equal to what you claimed or could have claimed for depreciation over the years. Learn more about deducting capital expenses on Business.gov.
  • Tax law is always changing - make sure you're up to date on the latest requirements with the Small Business and Self-Employed Tax Center from the IRS.

Need more help? Visit Tax Help and Training on Business.gov for videos, frequently asked questions, and information on tax workshops and training programs.

Related Resources

Message Edited by NicoleD on 11-20-2009 11:25 AM
Tags: Community Blogs, Small Business Cents

Comments

shiftins | Window Shopper | 7/10/2012 - 4:43 pm

This is great to know. I have a small office that I work from half of the
time and the other half I work from home. Would it be safe to write it off as
50-50 or is there a minimum % of use that I would need to claim to write off
the house expense?
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billbee4 | Window Shopper | 12/2/2009 - 11:44 am

Thanks a lot very needy information. I run a in-home business. I do web design and small business Internet consulting. Most of it is done from the comfort of my home. I have been trying to figure out a way to make deductions on my income tax for the space I use. Message Edited by NicoleD on 12-02-2009 11:47 AM
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NicoleD | Former Moderator | 12/2/2009 - 10:53 am

smallbiztrends and ohioquotes - thanks for your comments. You both make important points!

Ohioquotes | Creator | 12/2/2009 - 10:46 am

I do NOT use this deduction as it substantially increases your chance of being audited. In fairness, since I do NOT use my home office for 100% business use, I would have to adjust things to qualify anyway.
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smallbiztrends | Guest Blogger | 11/25/2009 - 4:51 pm

Thanks for including the calculation example. Most people I know are shocked at how small a percentage the business-use portion of their home turns out to be. Some people just decide it's not even worth claiming the deduction.
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