Many entrepreneurs start their businesses out of their homes. When this is the case, small business owners are entitled to deduct expenses for the business use of their homes. The home office deduction is available to both homeowners and renters.
The IRS lists its two basic requirements to claim the home office deduction on its website.
1. Regular and Exclusive Use
The part of your home that is exclusively used for your business is deductible. Generally, the value of the deduction is based on the portion of your home devoted to your business. Thus, your office that contains your work computer, printer, etc. will be deductible. The kitchen is not… unless you are a chef.
2. Principal Place of Your Business
You should be able to prove that your home as your principal place of business. However, if you conduct business at a location outside of your home, but also use your home regularly to conduct business, you may qualify for a home office deduction.
Using IRS Form 8829, Expenses for Business Use of Your Home, taxpayers can figure out the home office portion and enter the amount onto schedule C.
Once a taxpayer determines that a deduction can be taken, he must segregate them into direct and indirect expenses.
Direct Expenses are those which relate to the home office (e.g., painting the home office). All of the direct expenses are deductible.
Indirect Expenses are those that relate to the entire house (e.g., painting the outside of the house, a security service, and rent). Only the portion of the indirect expenses that relate to the home office are claimed as a deduction. This portion is determined by the amount of square footage of the office as it relates to the home.