If you conduct business from your home, you may be able to claim some of your household expenses as a deduction on your income taxes. The U.S. Internal Revenue Service has strict rules for the circumstances under which such home business deductions are allowed. Nevertheless, the IRS receives millions of claims for home office deductions every year, amounting to billions of dollars in reduced tax bills. As a general rule, the larger the portion of your home devoted to a home business, the greater your deduction will be.
Millions of business owners, employees and freelancers conduct all or part of their business from home. For example, a doctor may have part of her home set up as an examining room for patients, or a real estate agent may have a home office for computer and paperwork, phone calls and meetings with clients. Widespread use of the Internet has expanded home business opportunities for writers, graphic designers, software programmers and others who can carry out a substantial part of their business online.
Business use of your home may entitle you to take a deduction on your income taxes if your business meets the requirements established by the IRS. There are two key requirements for allowable deductions. You must dedicate part of your home to "regular and exclusive use" for your business. That is, a room cannot be used for business sometimes and for other purposes at other times. Secondly, your home office must be the principal place where you conduct business. The IRS publishes detailed explanations of all requirements for home office deductions as well as unusual instances where a business may be exempt from certain requirements.
A home office or business that meets IRS requirements entitles you to take a deduction for some of your home expenses. For example, you can deduct a portion of your mortgage interest, home insurance and household costs such as utilities, maintenance and repairs. The amount you can deduct is tied to the size of your home office. For example, if 10 percent of your home is dedicated to home office use (based on square footage), you can deduct 10 percent of home expenses on your taxes.
A sole proprietorships is the type of business organization used by most home businesses. Unlike other forms of business organization, such as partnerships and corporations, there is little or no paperwork and registration requirements for establishing a sole proprietorship. However, a sole proprietorship does not offer the limited liability provided by corporations and other more complex forms of business organization.
Average Home Office Deduction
The IRS publishes detailed statistics of tax filings from sole proprietorships, including the total number of filings and the overall amount of home office deductions. In 2007, the most recent year of data available as of publication, the IRS received 23.1 million tax filings from businesses reporting as sole proprietorships. These businesses earned a total of $1.3 trillion and claimed $1 trillion as business deductions. Of this amount, $11.2 billion was claimed as home office deductions. The average home office deduction in 2007 was $11.2 billion divided by 23.1 million businesses, or $485 per business.
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