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Business Use of Home – Tax Guide
2016 © BDS Accounting & Tax - Gladstone Missouri Z3
If you operate a business, or as an employee you work out of your home, you may be able to deduct some expenses of operating your home. Effective with the 2013 tax year there is a new simplified method for calculating the deduction or the traditional method can still be used. To deduct the expenses you must meet three criteria: 1. The space is used regularly & exclusively as the principal place of business. 2. The space is used to meet with clients in the normal course of business, or 3. In connection with the business if it is a separate structure not attached to the taxpayer’s personal residence. The first step in determining the deductible expense is to determine the square footage of the office space and the total square footage of the home.  The ratios between these two items determine the percentage of deductible expense. The Two methods Beginning in 2013 the IRS allows a simplified method for calculating the costs of the business use of the home The simplified method: After determining the “office” square footage, the deduction is $5.00 per foot (up to a MAX OF 300 square feet).  In addition home related itemized deductions (mortgage interest and property taxes) in full can be deducted on the Schedule A. A major long term benefit of this method is that when the home is sold – there is no re-capture of the depreciation. The Regular method: There are two classifications of expenses to deduct: Direct expenses are those expenses directly related to the specific office space. This includes repairs to the office space, painting, etc.  100% of these expenses are deductible against the income of the business. Indirect expenses are the costs of operating the home including: Mortgage Interest Depreciation of the home Real Estate Property Taxes Home Insurance General repairs to the home Alarm Systems Rent Utilities All of these expenses are deductible based upon the square footage ratio. If the regular method is used – when the home is sold, the depreciation taken must be re-captured, and claimed as income. Reporting the costs Self-Employed individuals reduce their net income of their business by reporting these costs on their Schedule C – Profit or Loss from Business.  Generally these expenses are not allowed to reduce profit below zero. Employees may deduct the expenses it the business use of the home is for the convenience of the employer.  The expenses are reported as a Miscellaneous Deduction on Schedule A.  Therefore the expenses are only beneficial to a taxpayer that has enough deductions to itemize deductions.  Miscellaneous deductions are only allowed if they exceed 2% of the taxpayer’s adjusted gross income. IRS Circular 230 Notice:  Unless expressly stated otherwise in this transmission, any tax advice contained herein, forwarded with or attached to this message was not and is not intended to be used, nor may it be relied upon or used, by any taxpayer for the purpose of (1) the avoidance of any tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions, or (2) promoting, marketing or recommending to another party any tax transaction or tax-related matters that may be addressed herein.
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