Guide to Home-Based Business Tax Deductions

Working from home usually involves certain expenses. You've got your workspace, office equipment, business supplies and other necessities, much of which you can write off as home-based business tax deductions. There are exceptions, of course, and limits, but it isn't as complicated as many people think.

Use of the Home

Home-based business owners can take tax deductions related to the maintenance of their homes, but only if they meet the criteria set forth by the IRS. According to IRS Publication 587, you can deduct home expenses only for sections of your home dedicated exclusively to business use. A home office, for example, would qualify as long as it is for home-based business use only.

The exceptions to this rule are 1) if you use part of your home as a daycare facility; and 2) if you use part of your home for the storage of "inventory or product samples."

For example, you might use the family room in your home as a place to entertain children in daycare. After hours, you probably use the family room for recreational purposes, but home-based business tax deductions still apply to that area.

Calculating Business Use

The IRS offers two methods of determining what percentage of home expenses can be used as home-based business tax deductions.

The first is the most exact. Determine what percentage of square footage the space in your home used for business constitutes. For example, let's say you work in a home office that is ten feet by ten feet (100 square feet) and your home's total square footage is 1,200 square feet. In this instance, you could deduct 8.3 percent of home expenses.

The second method uses rooms rather than square feet. If your home office is one of five similarly-sized rooms, you could deduct 20 percent of home expenses.

Home expenses include rent, mortgage, utilities, and other regular bills you pay to maintain your living space. Of course, you might have home expenses used exclusively for your business (e.g. a phone or fax line), which can be used as full home-based business tax deductions.

Calculating Tax Deduction Priority

All home-based business tax deductions are not equal. While you can deduct portions of home expenses related to the business, these deductions are secondary to expenses devoted exclusively to the business.

For example, a business-use telephone line that is used only for communication with clients, suppliers, vendors and other work associates would be an exclusive business expense. This should be deducted prior to portions of utilities because that expense is a percentage of the whole.

This might not become an issue unless your exclusive home-based business tax deductions equal more than your gross income generated from the business.

Equipment and Depreciation

The IRS allows you home-based business tax deductions for equipment and furniture used for the business itself. For example, if you have a couch and a chair in your office where clients sit when you meet to discuss a project, you can deduct the cost of that furniture from your taxes.

There are two ways to do this. The first is to deduct the full purchase price of the equipment in the year in which it is purchased. This is a good solution if your other home-based business tax deductions aren't sufficient.

The second way to deduct equipment, furniture and other supplies is to spread out the cost of those items over seven years. This is known as depreciation tax deduction, and can help to even out your deductions over a period of years.

Managing Deductions

Regardless of the home-based business tax deductions you claim, make sure you keep good records about the costs of those deductions and how they are used. Receipts should be stored in a safe location, and you might want to make electronic copies of all receipts just to be safe.