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How much Home Office Tax Dedcution can I Take?

Guest post by: Krutika Chheda

Article Overview: Home Office deduction can probably save you thousands in expenses as well as Taxes. As more and more professionals and small business owners recognize the need to cut down on office expenses and have a better work life balance and with the growing square footage of American Homes in the past decade, it makes sense to use part of your home as an office. Not only can you save thousands on office expenses, you may also be able to reduce your taxes. IRS code provides a special tax deduction for Business use of your Home. You can deduct insurance, utilities, rent or mortgage expense as part of the Home Office dedcution. However there are specific guidelines and limits to the extent of how much you can deduct.

How much Home Office Tax Dedcution can I Take?

Figuring out the Home Office Tax Deduction

After you have figured out that you qualify for the Home Office Deduction (See previous articles by this author), you can now start to figure out how much deduction you can take. First of all we need to find out what percentage of your home is being used for Business Purpose.

Percent of Home used for Business Purpose

A reasonable methode to determine the percentage of home used for business purpose is to divide the square footage of your office by the total square footage of your home. For example, you use your basement to store retail products for sample and inventory for sale. The size of your basement is 1000 Sq Ft. The total size of your home is say 4000 Sq Ft (Including the Basement). Your office use of home is 25% (1000 divided by 4000). Your business percentage of expenses will be 25%.

New Business Set-up - Home Office Deduction

In case you have started a new business this year and used your home as an office for part of the year. You can still take the HOme Office deduction for part of the year. For example if you started your business on July 1st 2009. You can deduct home office expenses for second half of the year. In case you have had to spend money in buying furniture and equipment for your office you can deduct those expenses as well. For more on Start-up Expense Tax Deductions check previous articles by the author.

Home Office Expenses you can Deduct

There are two types of expenses that the IRS allows you to deduct. Direct and In-Direct expenses are deductible. Expenses that are not related to your business will for obvious reasons not be allowed to deduct.



Direct Expenses are expenses made only for the office part of your home. Examples of direct expenses are painting, repairs, furniture you may buy for your office part of home. These expenses are fully deductible. Lets say, you started a new business this year and purchased an office desk, book case, chairs and some other office furniture along with a computer, printer, fax, copy machine for your home office, all for about $10,000. You can deduct the full amount in your tax return. If you and your spouse are filing together and are above 28% tax bracket, the government effectively refunds you $2800 for these expenses on your tax return. Sweet isn't it?



Indirect Expenses are expenses you make to keep your entire home running. Examples of indirect expenses are Home Insurance, Utilities, general repairs. These are only partly deductible based on the percent of home used for business purpose. In the example above, if your business use of home is 25%, then you can deduct 25% of your home utility bills, insurance, general repairs and maintenance under the Home Office Deduction. So lets say if your utility and insurance cost is about $6000 for the year, you can deduct 25% of that, $1500 as part of the Home Office Deduction. For a list of additional expenses check the authors website.

Home Office tax deduction is a great benefit to new business starters, as you limit your office expenses in the initial years of your business and also take deduction on part of your home expenses that you were not allowed to take earlier. Hopefully I have given you enough ideas to save on your taxes. If you are serious about pursuing this deduction on your tax return this year, I would highly recommend you take help from a professional tax accountant. There are several factors that may affect your eligibility as well as long term benefits from sale of your home etc.

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Article Tags: home office deduction, irs code, office expenses, small business owners, small business tax deduction, small business taxes, tax deduction, work life balance



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