What is the Home Office Tax Deduction?
How to Start in an Online Business
Phase 2 – Step 4
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Creating an Online Affiliate Marketing Business, allows you to work at home. So, one of the first things that you need to do, is to understand What is the Home Office Tax Deduction?
Understanding this Deduction is necessary, in order to properly setup a Home Office, as well as your Books, in order to get the best possible Tax Deductions in this area.
Home Office Tax Deduction
The IRS states: “If you use part of your home for business, you may be able to deduct Expenses for the business use of your home. The Home Office Deduction is available for homeowners and renters, and applies to all types of homes.”
There are two basic requirements for you to be able to take a Home Office Tax Deduction:
1. Regular and exclusive use
You must regularly use part of your home exclusively for conducting business. Since you will be using it regularly, that part is easily satisfied.
Exclusive use means that you cannot mix business use with personal use. You must only use this office area for your business. So, technically, you will need to do your personal finances somewhere else in your home, as well as store your personal files elsewhere.
Truth be known, since ‘Big Brother’ does not live in any of the homes that take this Home Office Deduction, I would venture to say that there are many people out there that use their Home Office for both business and personal use, but would simply clear out the personal items if they were to ever get an in-house audit. (I’m just sayin’. Lol)
2. Principal place of your business
Simple enough. You must show that you use your home as your principal place of business. Since, you do not have a brick and mortar business set up elsewhere, and your Online Affiliate Marketing Business is conducted on your computer, this part is also satisfied.
It should also be noted here, that your Home Office does not need to be contained by walls. You could simply have a specific area, say, in your basement family room, where you keep your computer and business files. This would still be considered your Home Office.
Figuring Your Deduction
There are two ways that you can figure the Home Office Deduction:
1. Regular Method
2. New Simplified Method
If you use the Regular Method, Deductions for a Home Office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities. This usually goes by square footage. You would take the square footage of your Home Office space and divide it by the total square footage of your home.
Example: If the square footage of your Home Office space is 200 sq. ft. and the total square footage of your home is 2000 sq. ft., you simply divide the 200 by the 2000. This will give you a decimal of .10 which is converted into 10%. So, 10% of your home is your Home Office space. Therefore, 10% of your home’s Expenses would be able to be deducted for your Home Office Deduction. These would include 10% of your: mortgage interest (not payment) or rent payment, home taxes, homeowner’s or renter’s insurance, utilities, repairs.
When it comes to repairs, 10% of repairs that affect your whole house, such as, a roof repair, whole outside house painting, or a furnace repair would apply. Repairs to the specific Home Office area, such as new paint for that room, or new flooring there, would be able to be deducted 100%, including any contractor costs and building permits. Repairs to other specific rooms in the home, such as a kitchen or bathroom remodel would not be able to be deducted.
You can also take a Deduction for Home Depreciation, but I generally do not recommend it. The reason being, is that when you sell your home, and if a profit is made, you will need to file a Recapture which will decrease your Deductions at that time. Therefore, I rarely think that it is beneficial, and therefore recommend that you do not take it.
The New Simplified Method is calculated as follows:
- A Standard Deduction of $5 per square foot of home used for business (no other Deductions apply).
Example: If your Home Office is a 9’ x 12’ room or space, your square footage would be 108 sq. ft. ( 9 x 12 = 108). Your Deduction would be 108 x $5 = $540.
- The Maximum Allowable Deduction is based on a maximum of 300 square feet for your Home Office).
Example: If your Home Office is a 20’ x 20’ room, your square footage would be 400 sq. ft. Since your Maximum Allowable Square Footage that can be applied to the Home Office Deduction is 300 sq. ft., your Allowable Deduction is $1500 (300 x $5 = $1500, not 400 x $5).
- Allowable home-related itemized Deductions are claimed in full on Schedule A (if you itemize your Deductions). (These would be items like: Mortgage interest, real estate taxes, etc.). If you itemize your Deductions, then, the Home Office Deduction no longer applies to these areas, as well as no Deductions for utilities, repairs, etc.
- No home Depreciation Deduction or later Recapture of Depreciation for the years the Simplified Option is used.
You can choose which method that you want to use each year. I would recommend that for at least the first year, you calculate your Deduction using both methods, compare the results, and choose the one that gives you the largest Deduction. After that, you can simply use that same method each year, unless circumstances change dramatically for a given year.
For additional information on the Home Office Deduction, see my Support Post: An In-Depth Look at the Home Office Tax Deduction
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When you are ready, see my next Post in the series: Formatting Your First Spreadsheet – Phase 2 – Step 5.
Thank you. Sincerely,