- Example 1: You have a separate shelving unit in your basement that holds boxes of inventory. This space used exclusively for your business may be included when determining your home office deduction.
- Example 2: You have some clothing and purses that you have listed on eBay that are kept in your closet, interspersed with your own personal items. This would not be exclusive use and this area could not be used as part of your home office deduction calculation; however, if you were to amass several items into an area of your closet, exclusive for items you are selling, this section of the closet could qualify.
Home office deductions are limited by the amount of associated home business income—in other words, you cannot use the home office deduction to put you into a net taxable loss, but you can use it to bring your home business income to zero. There is a simplified method and a non-simplified method for calculating the deduction, and the IRS allows taxpayers to choose annually whichever method they prefer.
- The simplified method is easier to work with; however, it is limited to 300 square feet of designated space and any unused portion cannot be carried forward to the next tax year.
- The non-simplified method is based on the percentage of the home used for business purposes and it incorporates utilities, real estate taxes and home insurance into the computation. The record-keeping and calculations are more complex, and tracking depreciation and basis is also required, but using this method allows a taxpayer to carry forward unused portions of the deduction into a year where there is sufficient income to utilize it.
Proper planning and documentation is key to the optimum tax treatment. Please let me know if you would like me to assist you with your home office deduction or any other tax matters.