Home Business Expenses You Can Deduct
Once you have determined the percentage of space in your home that you can use for calculating home business deductions, the next step is to determine the kinds of home business expenses you can deduct. In addition to your other business expenses, the IRS allows you to deduct expenses that are related to the "business use of your home." If the expenses are not related to your business, you cannot deduct them.
Advertising, salaries, and supplies expenses are not deductible as "business use of the home," but they may be deductible elsewhere on your tax return. You might also have a difficult time convincing the IRS that a landscaping service is a legitimate business expense, unless you regularly have customers who come to your home for your services.
Be careful to separate business expenses from personal expenses. Then separate expenses into two categories:
Direct expenses are those used only for the business section of your home. An example would be paint, wallpaper, and carpeting used only in that area.
Indirect expenses are those paid for running your home which can be deducted based on the percentage of the home used for business (see "Calculating Your Home Office Space Deduction"). Typical indirect expenses include rent/mortgage interest, utilities, insurance, and general home repairs.
To determine the total indirect expenses, list all of your home expenses for the year. Here is a partial list:
- Real estate taxes
- Deductible mortgage interest
- Homeowner's insurance premiums (unless you have separate insurance for the business part of your home)
- Home repairs
- Utilities and services, such as electricity, gas, trash, water and sewer. (Telephone expenses are discussed below)
- Depreciation. To calculate depreciation on your home, use the lesser of (a) the fair market value of your home on the date you first used it for business, or (b) the purchase price (excluding land) plus major improvements minus casualty losses or other changes to your home's basis. Then multiply the amount by the business-use percentage.
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