Utilities are deductible from business income to the extent they are exclusively used for the business. For a dedicated business location, you can deduct 100 percent of the utilities, because the entire location is used exclusively for business. However, this gets complicated when using a portion of your home for business. Because a home business owner also uses the utilities for personal use, only part of the utilities costs can be deducted. The percent of your utilities bill is calculated as the percent of your home's square footage that is exclusively devoted to the business.
1. Determine which areas of your home are used exclusively for business. These areas cannot be used in conjunction with any personal activities, such as the bathroom or kitchen. These areas must also be segregated from personal areas, meaning a portion of a common room does not count. If an areas is used for a daycare business, then you may include it, but also determine the number of hours the area is dedicated to the day care business.
2. Measure the length and width of each business area and multiply these figures to calculate the square footage attributable to that business area. For example, a 10-foot by 12-foot office would be 120 sq. feet.
3. Add each business area's square footage together to calculate the total business area. As an example, a 120 sq. foot office and a 225 sq. foot storage room would total 345 square feet. If part of the business area is used for daycare, keep this figure separate for now.
4. Divide this measurement by the total square footage of the house to calculate the proportion devoted to business purposes. If you don't know your house's total square footage, measure every room and total the area calculations. As an example of the proportion calculation, If your house is 1,200 sq. feet, then you would divide the 345 sq. feet from the business area by 1,200 sq. feet. This gives you 0.2875. If calculating a daycare area, perform its calculation separately
5. Calculate the area and time portions for daycare use and add them to the total. As an example, if you had an additional 150 sq. foot of day care area, divide it by 1,200 to calculate its proportion of 0.125. Now, divide the total number of day care hours in a year by 8,760 to calculate the proportion of time devoted to day care. For a 40-hour work week that operates 52 weeks per year, this would be 0.237. Multiply this by the area proportion to calculate total proportion with respect to time, or 0.02968. Add this to proportion devoted to other business activities to calculate the total proportion for business use. In the example, your total proportion is 0.3172, which is also the proportion of utilities you may deduct.
6. Multiply this figure by 100 to convert into percentage format. In the example, you may deduct 31.72 percent of your utilities costs.
Items you will need
- Tape measure
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