Guide to Home Office Tax Deductions

The home office deduction can be used when a business is run out of the home in the form of a sole proprietorship . For the tax deductions to quality, the office must be used exclusively for business purposes which do not include non-profit activities or non-business activities that may be profitable. Generally speaking, for the business to qualify as such, the home office must be used regularly to service clients for profitable gain. This article will illustrate the forms needed to file home office deductions in addition to the types of deductions the proprietor can take.

Tax forms

In the United States the Internal Revenue Service and U.S. Department of the Treasury oversee the implementation of tax laws and regulations through efforts to make the public aware of the requirements placed upon their income whether it be business, personal or otherwise. This being the case, the IRS has specific forms required for filing home office deductions. A useful publication for further understanding the IRS regulations regarding home office deductions is called publication 587.

Specifically, this form required by the IRS for home office deductions is an addendum to the form 1040 known as form 8829. Form 8829 is entitled 'Expenses for Business Use of Your Home' and must be filed by April 15 of a given tax year if no extension has been applied for and approved. In addition to form 8829 the proprietor must also submit all other required forms such as the 1040, 1099's, W-2's, Schedule C's etc. depending on one's specific tax situation. If one is an employee using part of the home exclusively for employment purposes a form 2106 may be used in addition to the form 1040 and other form requirements.

Types of businesses that qualify

There are many types of business types that may qualify for a home office deduction including day care facilities, landscaping businesses, cleaning companies, consulting or counseling proprietorship etc. Areas of homes and built in apartments can also qualify as home office business deductions when the area is used solely for a rental business.

In the case of employees, telecommuters such as computer programmers, customer service representatives and freelance artists may also qualify for at home business deductions. There art two exceptions to the exclusive use qualification according to the Internal Revenue Service. These exceptions are use of space for business inventory and daycare operations. For more detailed information about qualifying it may be advisable to consult the IRS Publication 587.

Home office tax deductions

The good part of home office deductions is they can be deducted from income in addition to the standard 1040 deductions making one's taxable income potentially very low. In the case of mortgage interest deductions and overhead expenses such as electricity or gas, the square footage percentage of the home is first calculated, then that percentage is multiplied by the total mortgage interest and overhead expense to arrive at the deductible business portion of the expense.

Additional deductions include insurance expenses, real estate taxes, repairs and/or maintenance, utilities, "listed equipment" depreciation, and allowable "other" and operating expenses. Listed equipment may include computers, furniture, fax machines etc. that are used more than 50% of the time for the business or businesses in question. In other words, while space must be used 100% of the time, with the aforementioned exceptions, equipment only has to be used 50% or more of the time. Other expenses not included on the form 8829 can be listed on form Schedule C of the 1040 which includes expense deductions such as advertising, employee expenses, businesses services received and equipment maintenance.

Home office deductions can be a great way to make use of extra space as an income tax deduction. Such deductions should not be abused or used dishonestly as this would be tax fraud. For the home office to qualify for deductions it must be an area of the home used solely for the purpose of business. Equipment used in that space only has to be used 50% or more of the time for that business. The space must be used consistently for business use and two exceptions to the sole use requirement exist with the cases of business inventory storage and day care facilities.