You’ve decided to start a small business working out of your home. Life is great and you can’t beat the commute. Now, how will this affect your income taxes? Can you deduct expenses for use of your home? The answer is that it depends…on a lot of things.
First, the business must be for profit or an expectation of profit. Next, you must set aside an area that is used exclusively for this business. Perhaps you’ve set up a room with a desk, computer, file cabinets and storage for your product. Use the room entirely and exclusively for business purposes and it will be deductible. Beware, however, that as soon as you add a sofa bed in the corner for your in-laws to use when they come to visit, the space is no longer exclusive and you lose the deduction.
What is eligible for a deduction? This is where the math comes in. You must determine the total square footage of your home and the total square footage of the office. Example: Total house is 2,000 square feet and the office area is 200 square feet. This will give you a 10% office usage equation. You will then be allowed to deduct 10% of your costs for the upkeep and maintenance of your home which includes insurance, taxes, mortgage interest (or rent if you do not own), electricity, gas, and repairs for the entire house. Additionally, you can take specific fix-up and maintenance costs in full if they are solely for the business space.
Also available is a deduction for depreciation on the home. To determine this figure, use the cost of the house, less the value of the land, and depreciate this value over 39 years (commercial use value). When you sell the home, you must make an adjustment on your tax return for the depreciation, generally known as a depreciation recapture.
Be sure you fully understand the home office deduction and subsequent depreciation recapture before using it. Rules for the home office deduction can be tricky; therefore, it is wise to get professional tax help from an enrolled agent, America’s tax expert.
Angelia White, MBA, EA is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.
Angelia White is a federally authorized tax practitioner specializing in tax representation, tax preparation, and advisory services for small businesses and individuals. For more tips and information visit: www.acctpier.com and www.facebook.com/acctpier.