Home Office Deductions

You've started a new business in your home. If your business continues to operate from there, you may be eligible for a home-office tax deduction. Let's take a closer look to see if your home business qualifies you for this deduction.

At first, deductions were claimed for things like using the family room to address envelopes for business invoices. The home office deduction has been narrowed down to weed out uses that don't qualify. The use of the home for business now must meet certain requirements. The use has to be exclusive, regular, and for business. The room in your home where you conduct business is the primary place of operation even if you have another location where you also conduct business activities.

In essence, this means that the family room is precluded from being used as a home office deduction if you address envelopes there once a week. The "exclusive" requirement means that the room must be used for business and nothing else. A room normally used by other family members cannot also double as your office and qualify for the home office deduction.

This also goes for equipment in the home office. The use of the equipment must be for business and not personal use. For instance, if you have only one computer in your home, chances are the other family members are using it when you're not.

A room that's set up as an office and only used as such qualifies for the deduction. Any equipment for the business that can fit should be in that room to ensure that no one else can use it for personal reasons. For a qualified room, a portion of the interest paid on mortgage payments, taxes on the home, and utility bills can be deducted. Calculate the square footage of the room and then determine what percentage it comprises of the total area of the home. This amount is the percentage of the bills that can be deducted for your home office.

However, those who don't qualify for the home office deduction are not left completely out in the cold. There are other ways to garner a tax deduction for your business. For example, you can deduct the amount of money spent on equipment that's used in your business. This includes computers, printers and paper, copiers, pens, paper clips, post-it notes and the like.

Exceptions do exist to the exclusivity rule that applies to the home office deduction. If, for instance, the office is used as a daycare facility or to store inventory, the square footage of the room can be deducted. The deduction for the home office is limited by the amount of profit that you make from the business. To calculate this, add up your business expenses and the amount of profit you made during the current tax year. If your profit is equal to or more than your business expenses, you can claim all deductions that apply for the home office. On the other hand, if your business expenses are more than the profit you made, the home office deduction is limited.