Tax Blog

Home Office Deduction for Small Business

Business owners that primarily operate their business from their home may qualify for a tax deduction on the portion of their home used for business. The home office deduction can save small business owners money on taxes. To qualify for this tax deduction the portion of the home must be used exclusively for the business, on a regular basis, for any of the following: the taxpayer’s main place of business; a place of business where the taxpayer meets patients, clients or customers (the taxpayer must meet these people in the normal course of business); if it is a separate structure that is not attached to the taxpayer’s home, the taxpayer must use this structure in connection with their business; a place where the taxpayer stores inventory or samples. This place must be the sole, fixed location of their business; and under certain circumstances, the structure where the taxpayer provides day care services.

There are a number of expenses that may be deducted if the business owner meets the above-mentioned qualifications. The home office deduction allows for the deduction of the following expenses: Real estate taxes; Mortgage interest; Rent; Casualty losses; Utilities; Insurance; Depreciation; and Repairs and Maintenance.

There are two methods to calculate this deduction: (1) the Regular Method and (2) the Simplified Method. The regular method requires dividing the above expenses of operating the home between personal and business use. Self-employed taxpayers file Form 1040, Schedule C, and compute this deduction on Form 8829. The simplified method has a set rate of $5 a square foot for business use of the home. The maximum deduction allowed is based on up to 300 square feet. This will reduce the amount of required recordkeeping for the small business.

Additional sources for reference of special rules for certain business owners:

  • Daycare providers complete a special worksheet, which is found in Publication 587.

  • Self-employed individuals use Form 1040, Schedule C, Line 30 to claim deduction.

  • Farmers claim the home office deduction on Schedule F, Line 32.

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