John R. Bullis: Office in home deduction
With our economy like it is and with many folks operating a small business from their home, the income tax deduction for “Office in Home” can save some income tax.
Form 1040, Schedule C, is where the business income and expenses are reported for owners of a business that’s not a partnership or corporation. The net income is subject to two taxes; income tax and self-employment tax.
It’s not unusual for the self-employment tax to be a significant amount. Use 15 percent of net profits as a quick estimate of what that tax might be.
If you use part of your home exclusively and regularly for business, then part of the expenses of the home can be a business deduction for “Office in Home.” That will reduce your income tax and your self-employment tax.
Some folks have worried and not claimed the deduction for “Office in Home” because they think it will cause IRS to audit their return. That deduction is now normal and claimed on many sole owner business individual income tax returns. That deduction doesn’t cause an IRS audit.
The IRS has a good website that allows you to print out forms and instructions. It’s irs.gov. Then select “forms and instructions” and “form 8829” and “Instructions for Form 8829.”
You will see there’s first to enter the area used regularly and exclusively for business. For example, that might be 80 square feet. Then line 2 is the total square feet of your home. That will give a percentage for the business use. If the home is 2,000 square feet in total, then 4 percent is the business use.
The expenses include the mortgage interest, property taxes, insurance, repairs and maintenance, utilities and other expenses as well as depreciation expense on the home. The expenses are then multiplied by the business use percentage to get the deduction for Schedule C, line 30.
If you rent the home, the rent paid is entered and with the other expenses for utilities, repairs, etc. is multiplied by the business use percentage.
If your business has a loss, then the expenses for “Office in Home” aren’t allowed for that year, but they carry over and can be claimed in the next year with a profit.
If you’re entitled to the deduction, go ahead and claim it!
Did you hear? “There is never a wrong time to do the right thing,” by author unknown.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.