Small business owners should see if they qualify for the home office deduction
Many Americans have worked from home due to the pandemic, but only certain people will be eligible for the home office deduction. This deduction allows eligible taxpayers to deduct certain household-related expenses on their tax return when they file their 2021 tax return next year.
Here are some things to help taxpayers understand the home office deduction and whether they can claim it.:
- Employees are not entitled to the home office deduction.
- The home office deduction, reported on Form 8829, is available for owners and tenants.
- There are certain expenses that taxpayers can deduct. They include mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent.
- Taxpayers must meet specific requirements to claim a deduction for expenses related to the house. Even then, the deductible amount of these types of expenses may be limited.
- The term “domicile” for the purposes of this deduction:
- Includes a house, apartment, condominium, mobile home, boat, or similar property providing basic accommodation.
- A separate structure on the property such as a detached garage, studio, barn or greenhouse.
- Any part of a house that is used exclusively as a hotel, motel, inn, or similar establishment is NOT considered a “home” and, therefore, is not eligible for a home office deduction.
- As a general rule, there are two basic conditions for the taxpayer’s domicile to be eligible for a deduction:
- There must be the exclusive use of part of the house for the conduct of business on a regular basis. For example, a taxpayer who uses an additional room to operate their business may claim a home office deduction only for that additional room as long as it is used both regularly and exclusively in the business.
- The domicile must be the principal establishment of the taxpayer. A taxpayer can also meet this requirement if the administrative or management activities are carried out at home and there is no other place to perform these functions. Therefore, a person who operates outside of their home but also uses their home for business may still be eligible for a home office deduction.
- A portion of a home that is used exclusively for doing business on a regular basis, but that is not used as a principal place of business, will be eligible for a home office deduction if patients, clients, or clients are met at home Where there is a separate structure which is used exclusively for the conduct of business on a regular basis.
- Eligible taxpayers can choose one of the following two methods to calculate their home office expense deduction:
- Using the simplified method consisting of a rate of $ 5 per square foot for the commercial use of the home which is limited to a maximum area of 300 square feet and a maximum deduction of $ 1,500.
- Using the usual method whereby deductions for a home office are based on the percentage of the home devoted to business use. Any use of an entire room or part of a room for the conduct of their business will involve determining the percentage of the house used for commercial activities in order to deduct the indirect expenses. Direct expenses are fully deducted.
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