How to Get Your Small Business Tax Ready | Home Office Deduction
Last time we discussed accurately reporting all of your business expenses. The fourth step in getting your small business tax ready is making sure you are maximizing your home office tax deduction.
If you have an area in your home that you use only and regularly for business purposes, and you have no other outside office available for this purpose, you may be able to claim business use of home.
Here is what you will need to determine your office in the home deduction:
- Total square footage of your home office. This is the space specifically used for business.
- Total square footage of entire home
The total square footage of your home office the entire home will be used determine the percentage of the expenses you can deduct.
These home office tax deductions include:
- Mortgage interest
- Property taxes
- Rent: If you do not own your own home, how much do you pay for rent?
- Home or renters insurance: Break out if any additional premiums are due to business
- Repairs and maintenance: Separate total for those directly related to your business space and those related to your whole home
- Utilities: These include the utilities which are necessary for your business, such as electric, heat, internet, and trash. Do not include your phone line into the house unless it is a cost directly related to your business (i.e. long distance business calls or a second separate business line).
If you own your home you will also need the basis (cost plus improvements) of your home and the value of the land. These are used to determine how much depreciation will be used for the business use area. This item will need to be tracked yearly as it will be needed when you sell your home for capital gains. If you decide not to take depreciation, it will still need to be calculated upon the sale of your home because the IRS doesn’t care if you took the deduction but only that it could have been used.
Please note that the business use of the home cannot create or increase a negative income. The portion not used in the current year will be added to the next years home use deduction until used in full.