Besides the normal small business operating expenses like cost of goods sold and supplies, running a small business from the house may allow deductions related to the home. This article looks at income deductible home expenses related to operating a small business and how to figure those expenses on IRS Form 8829. All of the needed forms and schedules are available at the Internal Revenues Service’s website.
Expenses for Business Use of Your Home – Form 8829
If income is generated from a home office or business, a portion of the house may be deductible against the business income generated. Some of the expenses that may be used as deductions include:
- mortgage interest
- real estate taxes
- home insurance
- rent
- repairs and maintenance
- utilities
- home depreciation
To figure out how much of the home expenses can be used as a deduction, the first step is to determine how much of house is used for businesses purposes. For a home office this would include the area that’s used for the office. If selling a product, inventory storage space can also be included.
Calculating Business Portion of the Home for Income Deductions
The portion that’s used for business (office and inventory storage) is calculated in square feet. Measure the width and length of the area used for business and then multiple them to get the square footage.
Length x Width = Square Feet
Once the square footage is determined, enter the amount on line 1 of Form 8829. On line 2 enter the total square footage of the home. Then divide line 1 by line 2 to get the percentage of the home used for business purposes.
Example
- 300 sq. feet used for business
- 2,000 sq. feet to house area
- 15% total business area
Figuring the Allowable Deductions on Form 8829
Part II of the form is where the percentage of the business usage is applied to total home expenses. The total expenses are listed separately and then totaled. The total is then multiplied by the business usage percentage of the home, in the above example that percentage is 15%.
Depreciation of the Home on Form 8829
The business portion or percentage of the house may also be depreciated. The depreciation expense of the home, along with the other expenses related to the business can be deducted from the business income to lower the tax liability. Special instructions for the amounts and percentages of depreciation can be found on the IRS website.
Once all the expenses are totaled, the amount is then entered on Schedule C, line 30. The amount is then subtracted from line 29 (tentative profit or loss) to get the end result. The end result could be a business profit or loss.
If the end result is a profit, the amount must be transferred to Form 1040 and income tax must be paid on the profits. A loss would result if total expenses exceed business income.
Source:
irs.gov
James Clausen - Clausen received a Bachelors Degree in Business Administration in Automotive Management and Marketing at Northwood University, graduating ...
Join the Conversation