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My Blog
NTB Consulting: Posted on Friday, January 13, 2012 2:54 PM
The IRS allows self-employed taxpayers to claim a deduction for home-based business expenses if they meet certain requirements: - They must use the home office regularly and exclusively
- As the principal place of business for a trade or business.
- As a place to meet with clients, patients,or customers in the course of the trade or business; or in connection with thetaxpayer’s trade or business, if the location is in a separate structure not attached to the dwelling unit.
Note: Day care businesses are exempt from the “regular and exclusive” requirement. The IRS may allow a deduction for inventory storage if the product is regularly sold to others and there is no other fixed location available for the business. - When making home office calculations, consider direct and indirect expenses.
- Direct expenses are those that pertain exclusively to the home office, such as painting the walls or installing new carpet.
- Indirect expenses are those that pertain to the entire residence, such as rent, mortgage interest,taxes, insurance, repairs, utilities, casualty losses,and depreciation.
- Allocate indirect expenses between the business and nonbusiness portions of the home. The most accurate method of allocation is to divide the square footage of the office by the total amount of usable space in the home. If rooms are of approximately equal size, you can divide the number of rooms used for business by the total number of rooms.
- With a day care business, multiply this business percentage by the fraction obtained by dividing the number of hours the home is used for business by the total number of hours in the year (8,760 hours except in leap years).
- Once these figures are known, multiply the indirect expenses by the business percentage in order to apply the limitations.
The amount of expenses you can deduct is subject to specific limitations and ordering provisions. - Base the overall limitation on your net income from your business. This is the net income on schedule C without the home office deduction.
- If there is a loss, the IRS does not allow a home office deduction. When there is a net loss, carry expenses forward to future years when there is net income.
- The IRS allows three deductions in full regardless of the net income limitation. They are allowed under other code sections and may create a Schedule C loss. You must claim these in full before using any other home office expenses:
- Mortgage interest
- Real estate taxes
- Casualty or theft losses
- Once the otherwise deductible expenses have reduced net income, you can deduct the other home office business expenses.
- If net income remains at that point, you can deduct home office depreciation.
- Anytime net income reaches zero, carry forward the balance of the home office expenses.
- If you go out of business before using these carry forward amounts, they are lost.
This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here.This email includes, or may include, links to third party Internet Web sites controlled and maintained by others. When accessing these links the user leaves this email. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does NTB Consulting LLC have any control over, or responsibility for, the content of any such Websites. All rights reserved. |
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