Entrepreneurs and Filing the Home Office Deduction

 

Here, we will discuss the following:

1.     How to meet the home office deduction and rules that govern it.

2.     Applying the Rules to a Garage Home Office.

3.     How to Calculate Actual Expenses of your Home Office.

4.     Step-by-step process for applying for the home office deduction.

1. How to meet the home office deductions requirements when the home office is in the garage and rules that govern it?

According to the IRS, home office deductions apply to renters and homeowners, studios, workshops and garages within your home. A “home” can be defined as a house, condo, apartment unit, mobile home, or boat, so long as you can cook and sleep in it.

The IRS requires you to satisfy two requirements:

  1. Regular and Exclusive Use: you must regularly use part of your home exclusively for a trade or business.
  2. Principal Place of Business: you must be able to show that you use your home as your principal place of business, and you must be able to show at least one of the following:
    • You meet patients, clients, or customers at home.
    • You use a separate structure on your property exclusively for business purposes.

2. Applying the Rules to a Garage Home Office.

Does the home office deduction apply when the “home office” is in the garage? The IRS requires satisfying the 1. Regular and Exclusive Use AND 2. Principal Place of Business requirements.

       1.Regular and Exclusive Use:

How to satisfy regular and exclusive use of home office deduction when office is in the home garage? Regular use is defined as using part of your home for business on a continuing basis, not just for occasional or incidental business. And exclusive use is defined as an area within the home that is only used for business related activities and not personal activities.

Here, storing all trade equipment and using garage exclusively for making trade products will satisfy regular and exclusive use because you used the garage everyday to store and create trade related materials. Moreover, you only stored business related tools in the garage and did not mix personal activities in your claimed business space.

Lastly, under exclusive use, you meet the exception where it says that if you use part of your home to store inventory or product samples, then you don’t have to meet the exclusive use requirement.

Overall, the garage you used for storing your trade equipment satisfies the exception to the exclusive use requirement. And you using the garage continuously throughout the year to go and make trade related materials would satisfy regular use. Therefore, regular and exclusive use will be satisfied.

2. Principal Place of Business:

How to satisfy principal place of business? Principal place of business is satisfied when one of the following is met: you meet patients, clients, or customers at your home; or you use a separate structure on your property exclusively for business purposes.

Here, you can satisfy either one of the above conditions. For example, if you claim that you using the garage only for business purposes will satisfy the separate and exclusive space requirement because only your trade tools where stored there and you only went into the garage when you would retrieve a work related item.

Moreover, you can also satisfy the meeting customers in the garage condition by saying that you would have customers come to your garage for consultations, quotes, or Q&A sessions.

Overall, you will satisfy the principal place of business requirement.

3. How to Calculate Actual Expenses of your Home Office.

Simplified Method

How to calculate home office deduction? If using the $5.00 deduction per every square foot in the home office, you just multiply the length and width of the home office and times that by $5.00 to get your total square foot deduction.

For example, if the garage were 15 ft. by 20 ft., then your total square footage is 300 sq. ft. and you times that by $5.00 for your total home office square footage deduction that would be $1500.00. However, this is the max deduction for this method.

Regular Method

If you are using the regular method instead of the optional method, you must determine the actual expenses of your home office. These expenses can include mortgage interest, insurance, utilities, repairs, and depreciation. Generally, when using the regular method, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.

4. Step-By-Step Process for Filing Home Office Deduction.

If you satisfy both the 1. Regular and Exclusive Use and 2. Principal Place of Business rule, then you file IRS form 8829, Expenses For Business Use of Your Home. Then enter your total amount on Schedule C, Profit or Loss From Business. Finally, attach both Form 8829 and Schedule C to your form 1040 tax return.