Business Deductions: Use of Home for Business

Business Deductions: Use of Home for Business

Business owners operating from their homes may be eligible to deduct certain expenses related to the portion of their home used for business purposes.

Deduction Eligibility Criteria:

To qualify for the home office deduction, a specific area of the home must be used under one of the following conditions:

• Exclusive and Regular Use: The area is used exclusively and regularly as the principal place of business for a trade or business.
• Meeting Space: This area is used exclusively and regularly to meet with patients, clients, or customers in the normal course of trade or business.​
• Separate Structure: A structure not attached to the home is used exclusively and regularly in connection with the trade or business
• Storage: The area is regularly used for storing inventory or product samples in a trade or business selling products at retail or wholesale, provided the home is the sole fixed location of the trade or business.​
• Rental Use: The area is used for rental purposes.​
• Daycare Facility: The area is used as a daycare facility.​

Deductible Expenses:

Deductible expenses for the business use of a home may include:​

• Real estate taxes​
• Mortgage interest​
• Rent​
• Casualty losses​
• Utilities​
• Insurance​
• Depreciation​
• Maintenance and repairs

Methods for Calculating the Deduction:

There are two primary methods to calculate the home office deduction:​

1. Regular Method:
   • The deduction is based on the percentage of the home used for business.​
   • Direct expenses (specific to the business area) are fully deductible.​
   • Indirect expenses (for the entire home) are prorated based on the business-use percentage.​
2. Simplified Option:
   • Allows a standard deduction of $5 per square foot of the home used for business, up to 300 square feet.​
   • Home-related itemized deductions, such as mortgage interest and real estate taxes, can be claimed in full on Schedule A.
   • No depreciation deduction is allowed when using this method.

Special Considerations for Daycare Facilities:

Qualified daycare providers who do not use their home exclusively for business can calculate the business-use percentage based on when the applicable portion of the house is used for business purposes. ​

It is important to maintain accurate records and ensure that the portion of the home claimed for business use meets the IRS’s exclusive and regular use requirements to substantiate the deduction.

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