If you work at home and have several different companies that all contribute to your home-based business, then your home office expenses add up quickly. Depending on the number of home office expenses you incur each month, it may be difficult to keep up with your home office expenses. Fortunately, the tax code allows you to take a home office expenses deduction. Even if you do not claim this deduction on your income taxes, there are other ways to reduce your home office expenses. Here are five simple steps to help you learn how to take a home office expenses deduction.
Principal place of residence. You can have more than one home office location for a particular trade or business if you have two or more residences. But, if you also deduct home office expenses as part of your income taxes, then your home should be your primary place of residence. These factors help determine if your home office is your primary place of residence.
If you have two residences, then one is your primary residence. If you have a home office in the same building as your primary residence, then you can take a deduction of fifty per cent (rounding up to a full deduction of 60%) on the portion of your home office expenses that relate to that building only. You cannot deduct expenses from a second residence that are partially used as an office, even if you only partially use the second residence as your home office. Similarly, you cannot deduct expenses that are related only to a part of your entire home office.
One of the easiest ways to determine home office expenses is to determine your total area in square feet. If you have one automobile and it is your only transportation expense, then it is generally considered a part of your car and home office expenses. If you have one vehicle and it is your primary transportation expense, then it is not a deduction. Evaluate your expenses under the simplified option so that you know which expenses are deductible and which are not.
The itemized deduction involves figuring your expenses separately for each item that you purchase with your office-related expenses. It is confusing for many people because there are so many different items that can be classified under the category of “office expenses.” The best way to handle this issue is to break down your expenses into daily, monthly, quarterly, or yearly expenses. Once you have broken down your expenses based on these different categories, then you will be able to apply the percentage to each category so that you can get an idea of how much of your total expenses are being spent on office-related items. You will then be able to determine which of your itemized deductions are based on this percentage and use that percentage in your application.
When you calculate your home office expenses based on your business percentage of indirect expenses, you will be able to reduce your tax bill. Let’s say that you spend fifty per cent of your time working out at your gym, but you also spend thirty per cent of your time shopping and dining out. This means that you will be able to lower your tax bill by fifty per cent because you will be replacing items that you would normally have to write off on your income tax return, and you can use that money to offset your indirect business expenses. If you can write off all of your expenses, then you could be paying double taxation for your home office because you are not taking into account your indirect business expenses. Even though you may have to pay a bit more in taxes, you will end up saving a lot of money if you have a home business so you should take this into account.
Another great thing about the simplified method of calculating home office expenses is that it takes a lot of guesswork out of the equation. You simply calculate what you think your expenses are and then divide it by your pretax income. If you find that you spend more than you make, then you will need to adjust your deductions accordingly. The other nice thing about using the simplified method of deduction is that you will be able to keep all of the receipts you used to prove your claim and will not be audited as long as you kept all of your tax documents in order.