Tax Filing for Home-Based Businesses
There's one important difference in tax filing between a home business and a business located outside the home: one form is used to calculate the space allocated to your business, so you can deduct the costs of using this space from your business tax return.
A business needs a place to be, even an online business. And the expense for that place is a legitimate business expense, deductible on your business tax return.
Small business owners who work from their homes can claim a tax deduction for business use of the home, on Form 8829. To complete Form 8829, you will need to gather some paperwork for the calculation.
Meet the IRS and Test for Use of the Space
Before you begin to gather the paperwork to complete this form, you must be sure that the area or areas of your home meet the strict IRS use test. This area must be your principal place of business, and it must be used both regularly and exclusively for business purposes.
If you don't use this area regularly, or you use this area of your home for anything other than business, even if that use is only once or twice a year, it doesn't meet the "regular and exclusive use" test, and it cannot be used as a tax deduction.
Complete Form 8829 Yourself
You may be able to use the simplified method for calculating your home space deduction. If you have a small space (300 square feet or less), you can do a simple calculation to get the amount of the deduction. The calculation is currently $5 a square foot times the square foot area, up to 300 square feet.
If you can't do the simplified option and you don't feel comfortable completing Form 8829 yourself, gather up all of this information and take it to your business tax preparer.
To complete Form 8829, you will need to have an estimate of your business income, so you should have a rough estimate of your Schedule C net income for your small business taxes before you begin.
Information for Percentage Use of Home Calculation
Your first task is to calculate the percentage of your home that is used for your business. To calculate the percentage use, you will need to know:
- The total square footage of your home
- The total square footage of the area or areas you use for business purposes
Use these areas to get a percentage of home use. For example, if your home is 2000 square feet and the business-use area is 200 square feet, the area used for your business is 10%. You will be using this percentage for expenses below.
Home Expenses for Calculation
You will need to gather documents to substantiate your home business expenses for the year:
- Mortgage interest
- Property taxes
- Documents to substantiate any casualty losses
- Homeowner's insurance costs
- Home rent expenses
- Expenses for repairs and maintenance
- Utilities, including water/sewer, electricity, gas, trash
- Other home expenses, like Internet service
Gather up all of this paperwork before you start working on Form 8829, or take it to your tax preparer.
Adding Form 8829 to Your Business Tax Return
Once you have completed the form, you add it in the appropriate place on your business tax return. For Schedule C, you add the total amount of the deduction on Line 30.
The information in this article is general and is not intended to be tax or legal advice. There should not be an assumption that these expenses will be deductible on your business tax return. Each business situation is different, and tax laws change frequently. Consult with a tax advisor before submitting your business taxes.