Business Use of Home

In some circumstances IRS will allow companies to deduct part of the cost to rent / buy and maintain home to the extent it is used for business purposes. As working from home has become more and more common, there are some confusions about this deduction. To qualify for home use for business, a part of the house must be used exclusively for business. A dentist, building a clinic in the garage will be a perfect example when the deduction is allowed. On the other hand, a CEO working from his bedroom where he or she also sleeps does not qualify for the deduction. If using a bedroom as an office, it cannot be used for anything else to qualify for the deduction.

There are 2 methods for figuring out the deduction amount:

• Simplified

• Regular

The simplified method simply computes the total square feet used for business and multiplies it by $5. There is a 300 sqf cap on this method. So, the maximum deduction a business can get is $1,500.

The regular method does not have an upper limit and allows for deduction of the following expenses:

• Mortgage interest

• Rent

• Depreciation (on residential properties the useful life is 27.5 years and commercial ones 39 years. So, a residential property worth 1mm will have an annual deduction of $36,363)

• Utilities

• Property tax

The total amount is then multiplied by the percentage of use for business. The percentage is derived by dividing the sqf used for business by total sqf in the property. For example, a residential property with 1,000sqf is worth $100,000. the room used solely for business is 200sqf. The utility is $10,000 annually and property taxes are $1,000. First, we find out the percentage of use. 200 / 1000 = 20%. Then find out total expenses: $100,000 / 27.5 + $10,000 + $1,000 = $14,636. The last step is to multiply the total expenses by the percentage use: $14,636 x 20% = $2,927.2 is the tax deductible amount.