How to Deduct Your Home-office Expenses

If you run a business from the cozy confines of your home, you may be able to deduct a portion of your everyday living expenses.

Basic premise: You can deduct home-office expenses if you use a specific area in your home regularly and exclusively as the principal place of your business, a place to meet or deal with customers, clients or patients in the ordinary course of business, or a place to store inventory or product samples. In addition, you may be able to claim deductions for a separate structure (e.g., a detached garage) that is used in connection with your business.

However, you are not entitled to deductions if you simply take work home from your principal place of business. Also, if you are a corporate employee, the home office must be used for the ?convenience? of your employer and as a condition of employment.

How do you figure out the tax deductions for a home office? The home is treated as two separate properties?one used for personal purposes, the other for business.

For simplicity, let?s assume you use 10% of your residence as a home office. As a result, you can deduct 10% of your mortgage interest or rent, property taxes, utility bills (gas and electric), cleaning services, private trash removal costs and property insurance as home-office expenses. If you are a homeowner, you are also in line for a depreciation deduction based on 10% of the home?s business use.

Of course, you generally can deduct the full amount of your mortgage interest and property taxes anyway. But you are getting a tax bonus for the other everyday living expenses plus a sizeable depreciation deduction. The percentage may be based on either the square footage in your home or any other reasonable method.

Example: Mr. Green uses one of eight rooms in his home as an office. The entire home is 3,000 square feet, while the office is 300 square feet. In this case, the percentage that Green can use for his home-office deductions is 12.5% based on the number of rooms or 10% under the square footage method.

In any event, you cannot use the deductions to create a tax loss. Specifically, your home-office deductions cannot exceed the business income derived from the home office less (1) regular business expenses (e.g., supplies, postage, etc.) less (2) the portion of deductions you could claim in any event (e.g., interest and taxes).

Update: The IRS is weighing proposals to simplify the methodology for deducting home-office expenses. For example, one suggestion is to use a standard dollar amount based on square footage. However, it is unlikely that any changes would take effect this year.

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