How Do I Prepare My Home Office Tax Report for Business Taxes?
A Step-by-Step Guide
Your home office can be a source of tax saving deductions on your business income tax. Following these steps will help you get the most from this deduction.
Before You Prepare Your Home Office Tax Filing
To begin, consider your home office as a potential source of legitimate tax deductions. As long as you stay within IRS guidelines, you can take deductions for the use of your home office each year.
Requirements for Home Office Deductions
Before you consider taking a home office deduction, make sure the office passes IRS tests. The IRS says that the space you are using for your home office must meet these requirements:
- The business must be legitimate, not just a hobby that doesn't make a profit.
- Your home office space must be used as your principal place of business or for specific business purposes, like meeting clients or doing business paperwork.
- Your home office space must be used "regularly and exclusively" for business.
The "regularly and exclusively" requirement is the one most abused and most subject to IRS scrutiny and IRS tax audit. There can be no other use of the space set aside for this office. That's a difficult requirement, but you can minimize the chance that your deduction will be disallowed by (a) limiting the space to only that area you can prove is used exclusively for your business and (b) having documentation of expenses relating to the home use of your business.
Simplified Home Office Deduction Option
If you have a small home office, you may be able to use the new simplified home office deduction option, allowed by the IRS since 2013, in place of the more complicated option discussed below.
The simplified method allows you to take the deduction without itemizing all of your home costs, but you will still need to calculate the space for your home business (that "regularly and exclusively" part) (explained below). Using this method, you can deduct $5 per foot up to 300 square feet, for a maximum deduction of $1,500.
Even if you think you might qualify for the simplified deduction method, the standard method may give you more deductions and there are limits and restrictions. Talk to your tax preparer before you decide which deduction method to use.
This IRS article describing the simplified deduction might help you decide.
Use a Tax Preparer
If you use the simplified calculation method above, you may be able to do your own home office tax report.
But for a larger and more complicated home office, it's better to get a tax professional who has experience with small business taxes. You may miss something if you do this calculation yourself, and your preparer can help you avoid any pitfalls or missed opportunities.
Deducting Home Business Expenses: Step by Step
To deduct your home business expenses (not using the simplified method), you will need to use IRS Form 8829 to calculate the amount of the deduction. Here is a brief description of this process:
- Calculate the percentage of your total home space that is used regularly and exclusively for your home office. For example, if the total area of your home is 1200 square feet and your office space is 120 square feet, your office space is 10% of your home space. If your home office is a whole room, and your home has rooms of roughly equal size, you can use the "number of rooms" calculation method, but for most homes, the percentage of area method works better. Don't include a bathroom in your square footage unless you can prove that the bathroom was used exclusively for your business.
- You can use this percentage to determine deductions for home expenses that relate to your use of this home office. These home expenses include mortgage interest, homeowner's insurance, utilities, and any home maintenance performed during the year (roof repairs, for example). You may also be able to deduct home depreciation, but this is a complicated calculation best done by your tax preparer.
- You can also list and deduct direct expenses related to your home office. For example, if your home office was painted or had new carpeting, or you added some built-in bookcases, these can all be included in your home office deduction calculations. In some cases, you may need to allocate a percentage of use for these expenses between business and personal; for internet service, for example.
Read more about how to calculate the home office deduction on Form 8829.
Gather Information for Home Office Deduction Calculations
To help you with the process of deducting home office expenses, here is a list of expense documentation you should collect and bring to the meeting with your tax preparer:
- For the percentage calculation, your best estimate of the percentage of your home's total area and the area used by your business.
- For percentage calculation (for each expense, total for the tax year):
- Home rent, if you rent your home.
- If you own your home, real estate taxes and deductible mortgage interest.
- Homeowners insurance premiums (renter's insurance may be deductible; check with your tax advisor). Don't include homeowner's insurance if you have separate insurance on the business property.
- Costs of home repairs during the year that can be shown to include your office space. For example, repairing the whole roof would include your office area, but if you put a new patio on the other side of the house, it is not related to your business and won't be deductible.
- Damage to your home as a result of a casualty loss during the year; for example, home losses from storms, fire, flooding can be deductible for the business portion of your home.
- Utility costs, such as electricity, gas, trash, water, and sewer. (Telephone expenses are discussed below.)
- Other home expenses like Internet service and your home phone, that can be divided between your business and home in percentages
- For home depreciation deduction you will need (a) information on the fair market value of your home on the date you first used it for business, or (b) the purchase price (excluding land) plus major improvements minus casualty losses or other changes to your home's basis. Let your tax preparer make the calculation on this item.
For each of these items, you will take the percentage calculation and multiply the cost by this percentage. For example, if your home office space is calculated at 10 percent of the total house space, you would need multiple home insurance premiums by this percentage.
For direct expenses related to your home office use of your home, include documentation of the amount spent during the year. These expenses may not be deductible on Form 8829, but they should be deductible on your small business tax form Schedule C.
Reporting Home Office Deductions
The result of your completed Form 8829 is included on Line 30 of the Schedule C for your home business. Schedule C information is added to other sources of income on your personal tax return. How you report your home office deductions varies by business type.
If Your Business Has a Loss
Your home office deduction is limited if your business has a loss. Read more about how losses affect home office deductions.
For more information on this deduction, the IRS has a 32-page book (Publication 587) that discusses this subject.
Disclaimer: The information in this article and on this site is for general information purposes only. The author is not an attorney or tax professional. Every situation is different and laws and regulations may change. Before you make any tax or legal decisions, check with a professional business advisor.