Some business owners in Arizona may qualify for the home office tax deduction. This applies to those who converted a part of their home solely for business purposes. Here are the key points for claiming the home office deduction:
Eligibility Criteria
Meet the criteria below to be eligible for a home tax deduction.
- Exclusive Use: The space must be used solely and consistently for business purposes.
- Principal Place of Business: Your home office must be the main place of business. It is where you perform the majority of your administrative or management tasks. You may meet clients and customers here regularly as well.
- Employee Use: The home office for your business cannot be rented out to your employer.
Types of Deductions
There are two ways to calculate the home office deduction.
a. Simplified Method
- Standard Deduction: $5 per square foot of the home used for business. It can be up to 300 square feet only.
- Maximum Deduction: $1,500 per year.
- No Depreciation: There is no depreciation deduction for the part of your home utilized for business.
b. Regular Method
- Direct Expenses: Costs directly related to the home office are entirely deductible. This includes painting or repairs in the designated area.
- Indirect Expenses: The deduction is based on the percentage of the home used for business. It includes mortgage interest, insurance, utilities, and general repairs.
- Depreciation: Depreciate the part of your home used for business.
Calculation of the Deduction
Simplified Method Example:
- Office Size: 200 square feet
- Deduction: 200 sq. ft. x $5 = $1,000
Regular Method Example:
- Office Size: 10% of home
- Home Expenses: $10,000 in indirect expenses (This includes mortgage interest, utilities, etc.)
- Deduction: 10% x $10,000 = $1,000 (Add any direct expenses related to the home office.)
Reporting the Deduction
- Form 8829: Use IRS Form 8829 for the regular method. It is labeled “Expenses for Business Use of Your Home”. This form will help you calculate and report the home office deduction.
- Schedule C: Write down the deduction on Schedule C (Form 1040), “Profit or Loss from Business”. This is for sole proprietors.
- Employee Expenses: Employees must use Form 2106: “Employee Business Expenses”. Tax Cuts and Jobs Act (TCJA) limits employee deductions for home offices.
Important Considerations
- Audit Risk: Auditors examine closely home office deductions. Provide official and supporting documents.
- Sale of Home: Recapture depreciation for the portion of the home used for business.
- State Conformity: Arizona adheres to federal regulations for the home office deduction.
Record Keeping
- Documentation: Compile all receipts, utility bills, mortgage statements, and insurance policies.
- Area Measurement: Provide official measurements of your home and the home office. It will determine the percentage used for business.
Understand and apply the home office tax deduction rules correctly. Reduce your taxable income and save a significant amount on your taxes. Consult with a tax professional or accountant to ensure you meet all requirements. They will help optimize your deductions.