Many small businesses may qualify for the office in home deduction, which is available to both homeowners and renters. In order to take this deduction, the taxpayer must have a designated portion of their house that is used exclusively for their business. This area must be the principal place of business or where they regularly meet with clients. It does not necessarily have to be the principal office.
If it is determined that the taxpayer qualifies for this deduction, they can choose from two methods. The standard method is referred to as percentage of home. This is calculated by measuring the devoted office space and determining the square footage, then calculating it as a percent of your total home square footage. For example, if the office is 200 square feet and your home is 1,800 square feet, we can calculate that your home office percentage is 12% (200/1,800). After determining the percentage of the office, apply it to the expenses related to maintaining the office in home. In the example above the taxpayer would be allowed to claim 12% of utility bills, homeowners insurance, property taxes and mortgage interest as a deduction.
In 2013 the simplified method became available to the taxpayers. This method helps to alleviate some of the complexities surrounding the standard method. Using the simplified method, the taxpayer is allowed to claim $5 per square foot, up to 300 square feet. Using the amounts from above, the home office deduction allowed is $1,000 (5*200 square feet). By using this method, the taxpayer is able to deduct itemized deductions such as mortgage interest & property taxes in full on Schedule A. This differs from the standard method, where they are split based on the percentage allocation. The simplified method may be easier, but it might not always yield the largest deduction.
In order to take this deduction, IRS Form 8829 must be completed. Information from this form will flow through to the taxpayers Schedule C.