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If you are planning to conduct a business out of your home, you should be aware that you could be eligible to take a very valuable tax deduction. The following is a summary of the qualification requirements:

1. ELIGIBILITY FOR CLAIMING HOME OFFICE DEDUCTION

If you use part of your home exclusively for business purposes on a regular basis, some of the costs may be deductible. This could involve a spare room, part of your basement, your garage, an attached building, or a separate structure. See IRS “Instructions For Form 8829" (which is used for “Expenses for Business Use of Your Home”).

The costs must meet these requirements (with exceptions for inventory and certain daycare facilities):

•  The costs must be related to a full- or part-time trade or business. Investing in stocks or bonds, for instance, does not qualify. 
• The business use must be regular. Periodic or occasional use of part of your home does not meet this test.
• The property or space must be used exclusively for business purposes. Alternating between business and personal use disqualifies the deduction.
• The business part of your house must be one of the following:

o The principal place of your trade or business and the most important function of your business must take place there. You must use it exclusively (except for a day care facility and inventory and product samples) and for administrative or management activities of your trade/business, and have no other fixed location where you can conduct substantial administrative or management functions for that trade/business (e.g.: billing customers, keeping books/records, ordering supplies). You are not disqualified, however, if you use another company to do your billing from its place of business.

o The place where you meet or deal with patients, customers or clients or perform services. More time must be spent there than elsewhere on your business. Most of your income from business results from your work there.

o A separate structure used in your business that is not attached to your home.

The part of your house used for business is measured as a percentage of the total square footage of your home. You can deduct all expenses that relate directly to the specific business area, such as painting a room used only as an office.

You must prorate expenses that benefit both personal and business use to the same degree, such as furnace repairs. You cannot deduct expenses unrelated to your business such as lawn care or cooking expenses. Do not deduct the fair rental value of that portion of your home.

2. AMORTIZATION

When you go into business, some costs incurred to get your business started , or while investigating the creation of a business may be tax deductible, but must be treated as capital expenses, some of which are amortized and some depreciated.

Amortization is a method of recovering (deducting) certain capital and startup costs over a fixed period of time, not less than 60 months (similar to the straight line method of depreciation). It is treated in Instruction for IRS Publication 587, “Business Use of Your Home”, Publication 535, “Business Expenses”, Instructions for Form 4562, “Depreciation and Amortization”, which are essential documents for determining legitimate operational and startup deductible expenses.

Refer also to SCORE Brief #10.11, “Tax Treatment of Business Startup and Organizing Costs”.

3. DEDUCTIONS

If your gross income from the business use of your home equals or exceeds your total business expense related to that use (including depreciation), you may deduct all of your business expenses connected with that use. If gross income is less, then your deductions for certain expenses are limited. In order to compute the allowable deduction for business use, you need to accumulate expenses in the following categories and present them in this order:

• Mortgage interest, taxes and casualty and theft losses.
• Business expenses not attributable to business use of the home (e.g., salaries, advertising). See par. 4.
• Business expenses attributable to business use of the home. See par. 4.
• Depreciation on the home.

Note: Categories 1 and 2 can exceed business income; Categories 3 and 4 cannot. However, disallowed expenses can be carried forward to later years.

If you are using your home for business, use IRS Form 8829 to compute the expenses for the business use of your home and bring that amount to Schedule C of Form 1040. If you rent rather than own, include the rent you paid as “other expenses” on Form 8829.

4. TAX DEDUCTIBLE BUSINESS EXPENSES

The IRS allows certain costs of operating your home-based business to be deducted if they are “ordinary” (expenses accepted and recognized in your particular field and are “necessary” (expenses helpful to the operation thereof), e.g.: common expenses for such as insurance, legal assistance, utilities, phone, advertising, supplies, equipment, business use of your auto, some travel, entertainment, and meal costs. Many of the expenses involve dollar limitations, situations, and circumstances acceptable to the IRS, so investigate what will be allowed before claiming.

5. LICENSES AND ZONING

For possible other requirements, check with your appropriate state, county and city licensing, tax and zoning agencies.

6. IRS SMALL BUSINESS/SELF-EMPLOYED WEB SITE

For IRS online home office startup information and online publications/forms, click here. 

This site has many links to varied subjects including:

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The site also has direct links to all 50 State which provide information on State license and permit requirements and other information, each with direct links to county, city, township and village government sites. For example, on the Ohio site you can get direct access to the entire Ohio Revise Code as well as business license requirements.

If you would like to request a Cincinnati SCORE counselor, please click here.

Disclaimer

The information contained in these briefs is for general information only. While we endeavor to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the information, products, services, or related graphics contained in the briefs Through these briefs you may be able to link to other websites which are not under the control of SCORE therefore the inclusion of any links does not necessarily imply a recommendation or endorse the views expressed within them. Any reference from SCORE to a specific commercial product, process or service does not constitute or imply an endorsement by SCORE or SBA or SCORE Chapter 34 or the United States Government of the product, process, or service or its producer or provider.