In the previous post, "Home-Based Business", I spoke a little about the deductions that can be used relating to your business taxes. I will dive a little deeper in this one. The more you know, the more you can grow!
Failure to qualify for the home deduction doesn't prohibit you from operating your business out of your home. It only means that one possibly large expense, the cost of the space itself, is not deductible on your federal income taxes. You can still deduct all legitimate business expenses other than those directly related to the business space. The "Home Expense" rules apply to sole proprietors, spousal partnerships, and one owner LLs. Partnerships, corporations, and multi-owner LLCs may be able to claim a home expense deduction on several factors that were covered in the previous posts.
TAKING THE HOME DEDUCTION:
There are two options for taking a home deduction: You can deduct actual expenses, or you can take a standard flat rate deduction.
Deducting actual expenses involves keeping detailed records of expenses, making multiple calculations, filing an additional tax form (Form 8829, Expenses for Business Use of Your Home), and, if it is a home you own, possible tax problems when you sell the home. By comparison, the flat rate deduction (the IRS calls it the Safe Harbor Method) is simple to figure, does not require Form 8829, and eliminates any tax complications when you sell your home.
Although the flat rate deduction is much easier to calculate and requires much less paperwork than using actual expenses, it probably will result in a lower deduction amount. Also, if your business is showing a loss, the flat rate deduction has some limitations. You can calculate the home deduction both ways and then decide which will give you the biggest deduction and the fewest hassles. Once you select a method, you are not stuck with it for future years. You can use one method one year, and the other method the next year if you want.
In the above sample floor plan a couple have businesses that are separate and therefore they can either use the flat rate deduction for the first floor living space that's converted into an office for one business usage as well as the second floor bedroom that's converted into an office for the second business usage.