Employment
Self-Employment
Generally, you are self employed if you:
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Operate as an independent contractor
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Are the sole proprietor of a business or you practice a trade
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In some way or another are in business for yourself
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Things to know if you are self-employed:
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If you and your spouse operate a business together and file a joint return, both of you may be able to be treated as sole proprietors instead of as a partnership. Each spouse would report their share of income and expenses as a self-employed individual on the appropriate form (for example, Schedule C or Schedule F).
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Up to 100% of medical insurance costs you pay for yourself, your spouse, and your dependents may be deductible as an adjustment to income on Form 1040, U.S. Individual Income Tax Return. The deduction is subtracted directly from your total income and applies whether or not you itemize. If you purchase your health insurance through the Marketplace, you may have to adjust your deduction for your Premium Tax Credit you receive.
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If you use your vehicle for business purposes, you may be able to deduct expenses associated with such use. You may choose the actual expense method or use the standard mileage rate. If you choose the actual expense method, you must also keep track of your vehicle-related expenses for the year. Vehicle related expenses include gas, oil, insurance, repairs, cleaning, registration, etc. The business portion of your personal property taxes and vehicle loan interest is also deductible. Whichever method you choose, you must keep track of the mileage on your car from the first day of the year or the first day you use your car for business through the end of the year.
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You may be entitled to a tax break if you are operating a business from your home. The following questions will help you determine whether you can deduct the business use of your home:
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Is this part of your home used regularly and exclusively in conjunction with your business or work?
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Is this your primary place of business?
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Is this where customers and clients meet with you?
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Is this where you store product samples?
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Is this where you administer or manage your trade or business?
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If you answered yes to any of these questions, you may be able to deduct certain depreciation and operating expenses for the business use of your home. The same might apply if you use a separate structure, such as a shed.
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You may recover your investment in certain business-related properties (such as equipment, a vehicle, or a building) through the use of depreciation. In this manner, you deduct some of your cost on each year's return. If you do not claim the depreciation, and later sell the property, the IRS calculates the basis as though you had taken the deduction each year. If you have unclaimed or have underclaimed depreciation deductions on property placed in service in prior years, you may be able to fully recover all allowable depreciation in the current year.
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Certain types of business property may be deducted in full the year they are place in service as a section 179 expense rather than deducting a portion each year under the depreciation method of deduction. Up to $1,000,000 of certain tangible business property may be deducted in the year it was placed in service as a section 179 expense deduction rather than using depreciation.
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Your employees' wages and salaries are deductible if they are paid during the tax year for work directly related to your business and the pay is reasonable. You must be able to verify that the payments were made for duties actually performed. There are various types of withholding for different types of employees. Specific forms must be used for reporting payments made to employees.
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You may be able to deduct expenses for a leased asset (such as a car or computer) used in your business. If it is not used solely for business purposes, you may deduct only the percentage of use that applies to your business or work.
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Business tax credits can reduce your tax liability. There is a credit for providing access to the disabled and a work opportunity credit for providing work for members of groups with special employment needs or higher unemployment rates.
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If you are a freelancer writer, photographer, etc., you may qualify to use Schedule C, Profit or Loss from Business, as a self-employed individual and report your deductible business expenses on that form.
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Costs that you have when setting up an active trade or business, investigating the possibility of creating or acquiring a business, and some legal fees are business start-up costs. You can choose to deduct up to $5,000 of business start-up costs with the remainder amortized over 15 years. Franchise fees, goodwill, and customer-based intangibles are also amortizable.
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If you use an accrual-basis method of accounting and you have been unable to collect money owed to your trade or business, you may be able to deduct that debt. You must have previously included the money owed as income so that you have a basis in the debt. A cash-basis taxpayer normally does not report income until they receive payment so they cannot deduct a bad debt.
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The tax implications of a self-employed individual are different from those of an ordinary wage earner. Each situation may present a number of complex tax questions.
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Certain individuals who are covered by a high deductible health insurance plan may be able to contribute to a health savings account (HSA). An HSA is a tax-exempt trust or custodial account that you set up with a U.S. financial institution (such as a bank or an insurance company) in which you save money exclusively for future medical expenses. The distributions from HSAs are tax free if they are used for qualified medical expenses. Contributions are deducted from your gross income when calculating adjusted gross income, which means you do not need to itemize deductions to claim your contributions.
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You should also consider the following questions before you begin preparing your tax return:
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Will you have to pay Social Security and Medicare taxes, FUTA taxes, and workers' compensation insurance?
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Will you have more than one trade or business?
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What if your attempt to operate a business fails?
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Should your financial calculations be based on a calendar year or a fiscal year?
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Here are some additional credits and deductions for small business owners:
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Qualified leasehold property placed in service during the year is eligible for up to $1,000,000 in a section 179 deduction. This includes improvements to rented business property necessary for your business.
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There is a special bonus depreciation rate of 50% of the basis of qualified property placed in service during the year. The remaining 50% should be depreciated using the regular class-life for the asset.
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There is an additional Medicare tax of 0.9 percent for self-employed taxpayers who have a total earned income of more than $200,000 ($250,000 fi married filing jointly or $125,000 if married filing separately).
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All professional fees you pay, such as legal fees, accounting fees, tax preparation, even banking fees can be deducted from your income.
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Contact The Mobile Tax Man office for more information or assistance. 214-317-9927
Job Related Business Expenses
Business Job Related
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Note: On the new tax reform starting on year 2019, the business job related deduction is no longer available for federal purposes, unless you need to prepare your State Income Taxes were it is available.
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Computer and Cellular Phone
If you purchased a computer or cellular phone and use it for business, you may be able to claim a depreciation deduction. Your employer must require you to have the phone or computer as a condition of your employment, and you must use them for the convenience of your employer. You must keep a record of the personal and business use of the computer or phone to determine the percentage of business use.
Entertainment
If you incur entertaining costs for business reasons, you may be able to deduct 50% of the amount. The expense must be considered ordinary or necessary to your profession. Entertainment generally includes any activity considered to provide entertainment, amusement, or recreation to potential business clients.
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Miscellaneous Job-Related Expenses (if your are filing the states income taxes were it is available)
Some of your job-related expenses that may be deducted include union dues, job-related magazines and books, and other related business expenses. Generally, you must depreciate the cost of tools used in your work. If your employer requires you to wear work clothes or uniforms that are not suitable for everyday wear, you may deduct the cost and upkeep. Job-related expenses are claimed as part of your itemized deductions under miscellaneous deductions subject to the 2% of adjusted gross income floor.
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Moving Expenses
If you moved at least 50 miles in the last year and your move was job-related, you may be able to deduct the cost of moving your household goods and your traveling expenses. The standard mileage rate for moving is 17 cents per mile. Claim moving expenses directly on Form 1040.
Note: On the new tax reform starting on year 2018, the moving expenses adjustment is no longer available for federal purposes, unless you are a military member
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National Guard and Reserve Members
If you are a member of the National Guard or Reserves and you must travel away from home to perform your service (such as for a drill or a meeting) in a location that is more than 100 miles away from your home, you can take a deduction for related travel expenses as an adjustment to income, even if you do not itemize your deductions. Allowable expenses include expenses for overnight transportation, meals, and lodging. The amount of the allowable expenses cannot exceed the amount the federal government pays its employees for travel expenses.
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Section 179 Expensing - General
If you purchase certain qualifying equipment, you may deduct the cost by making a section 179 expense deduction. The maximum section 179 for the year is $1,000,000. The section 179 deduction is phased out if the total amount of qualifying property placed in service exceeds $2,500,000.
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Self-Employed Health Insurance
If you are self-employed, you may deduct up to 100% of your medical insurance costs that cover yourself, your spouse, and your dependents as an adjustment to income. To do this, you (and your spouse if filing jointly) must not be eligible for coverage by an employer-subsidized health plan. If you receive a Premium Tax Credit, you must adjust your deduction.
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Start-Up and Organizational Costs
You may be able to claim a deduction of up to $5,000 for start-up and organizational costs. The deduction is reduced by the amount of the start-up costs exceeding $50,000. If you cannot deduct all your costs in the first year the business begins, amortize the remaining costs over 15 years.
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Tip Income - Allocated Tips
If you receive tip income, and work for a large food or beverage establishment, your employer may be required to allocate an amount of tips to you on your Form W-2. Your employer must allocate tips if the amount of tips you reported to him is below the IRS required minimum percentage of gross sales. The difference is called allocated tips and is in box 8 of Form W-2. You will have to include these allocated tips in your income and also pay Social Security and Medicare tax on them.
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Tip Income - Record of Tips
Do you receive tips as part of your income? You must report all tips as wages on Form 1040. If you receive tips of $20 or more in one month, you must also keep a daily record of tips received and give your employer a written report of your tips for that month by the 10th day of the next month.
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Travel Expense
You may be able to deduct business travel expenses if you must conduct business away from your tax home. The cost of transportation, lodging, laundry, dry cleaning, and telephone expenses are some of the deductible expenses. Generally, meals are only 50% deductible. If you are subject to the Department of Transportation hours of service limits, you may be able to deduct 80% of your meal expenses.
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Unemployment Compensation
Have you received unemployment compensation during the year? You must report all unemployment compensation as income. State and federal unemployment insurance benefits, and railroad unemployment compensation benefits are all considered taxable income. You can choose to have income tax withheld from any unemployment compensation you receive.
Job Related Moving Expenses
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Note: On the new Tax Reform the adjustment for moving expenses, starting on 2018 are not longer unless you are military member
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You may have changed jobs during the year or your employer may have transferred you to a new location. If your job change required you to move to a new location, and you meet the following qualifications, you can deduct your job-related moving expenses.
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Moving Deduction Requirements
To qualify for a job-related moving expense deduction, your move must be closely related, both in time and in place, to the start of work at a new job location. You must also meet the specific requirements of the IRS Distance Test and Time Test.
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Closely Related in Time
Generally, moving expenses incurred within one year from the date you first reported to work at the new location are considered closely related in time to the start of work. You do not need to have a job arranged before moving to a new location, as long as you actually do go to work within the year.
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If you do not move within one year of the date you begin work, you ordinarily cannot deduct expenses unless you can show that circumstances existed that prevented your move within that time. For example, you delayed your move for 18 months to allow your child to complete high school.
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Closely Related in Place
Generally, your move is closely related in place to your job if the distance from your new home to the new job location is not more than the distance from your former home to the new job location. A move that does not meet this requirement may qualify if you can show that you are required to live at your new home as a condition of your employment or that you will spend less time or money commuting from your new home to your new job location.
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Distance Test
In general, your move will meet this test if your new main job location is at least 50 miles farther from your former home than your old main job location was from your former home. For example, if your former workplace was three miles from your former home, your new workplace must be at least 53 miles from that home.
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Time Test
If you are an employee or a self-employed taxpayer, you must work full time for at least 39 weeks during the first 12 months after you arrive in the general area of your new job location. Additionally, if you are a self-employed taxpayer, you must work for a total of at least 78 weeks during the first 24 months after you arrive in the general area of your new job location. Full-time employment depends on what is usual for that type of work in the area.
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To meet this test, you do not have to work for the same employer for all 39 weeks or be self-employed in the same trade or business for the 78 weeks. If you are an employee, the 39 weeks you work do not have to be sequential. You must work full time within the same general commuting area for all 39 weeks (all 78 weeks if self-employed).
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You do not have to meet the Time Test if:
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You are in the Armed Forces and you moved because of a permanent change of station (PCS orders)
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You moved to the United States because you retired
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You are the survivor of a person whose main job location at the time of death was outside the United States
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Your job at the new location ends because of death or disability
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Your job at the new location ends because you are transferred for your employer's benefit or laid off for a reason other than willful misconduct. For this exception, you must have obtained full-time employment and you must have expected to meet the test at the time you started the job.
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Deductible Moving Expenses
You can deduct the reasonable expenses you pay in connection with moving your household goods and personal effects (including in-transit or foreign-move storage expenses) and traveling (including lodging but not meals) to your new home.
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Household Goods And Personal Effects
You can deduct the following expenses for moving household goods and personal effects:
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The cost of packing, crating, and transporting your household goods and personal effects and those of the members of your household from your former home to your new home
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The cost of storing and insuring household goods and personal effects within any period of 30 consecutive days after the day your things are moved from your former home and before they are delivered to your new home
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Any costs of connecting or disconnecting utilities required because you are moving your household goods, appliances, or personal effects
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The cost of shipping your car and your household pets to your new home
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The cost of moving your household goods and personal effects from a place other than your former home; your deduction is limited to the amount it would have cost to move them from your former home.
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For example, Roxana is a resident of North Carolina and has been working there for the last four years. Because of the small size of her apartment, she stored some of her furniture in Georgia with her parents. Roxana accepted a new job and is moving to Washington, DC. It cost her $300 to move her furniture from North Carolina to Washington and $1,100 to move her furniture from Georgia to Washington. If Roxana shipped her furniture in Georgia from North Carolina (her former home), it would have cost $600. She can deduct only $600 of the $1,100 she paid. The amount she can deduct for moving her furniture is $900 ($300 + $600).
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Note: You cannot deduct the cost of moving furniture you may buy on the way to your new home.
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Traveling
If you use your car when moving, you can deduct your actual expenses (such as gas and oil) as long as you keep accurate records of each expense. You cannot deduct any part of general repairs, general maintenance, insurance, or depreciation for your car. You may decide to take the standard mileage rate instead of claiming your actual expenses. Whether you use actual expenses or the standard mileage rate to calculate your expenses, you can still deduct parking fees and tolls you pay when moving. The standard mileage rate for moving is 17 cents per mile.
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You can deduct the cost of transportation and lodging for you and members of your household while traveling from your former home to your new home using the most direct route. This includes expenses for the day you arrive at your new home. You can include any lodging expenses you had in the area of your former home the day your furniture was moved.
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You can deduct expenses for only one trip per person to your new home. You do not need to travel with or at the same time as other members of your household. Each person is allowed one trip.
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Nondeductible Expenses
The following is a list of expenses you cannot deduct as moving expenses:
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Any part of the purchase price of your new home
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The cost of buying or selling a home
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Amounts spent obtaining or breaking a lease
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Home improvements to help sell your home
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Loss on the sale of your home
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Meal expenses
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Pre-move house hunting expenses
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Security deposits (including any given up due to the move)
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Storage charges except those incurred in transit and for foreign moves
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Temporary living expenses
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Completing Form 3903
If the moving requirements are met, complete Form 3903. The amount of deductible moving expenses from the form is then entered on Form 1040 as an adjustment to income.
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Contact The Mobile Tax Man office for more information and assistance. 214-317-9927
Job Related Vehicle Expenses
Note: Based on the New Tax Reform, starting in 2018 this deduction is not longer available, unless you need to prepare your State Income taxes where it is necessary.
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If you want to take a deduction for the business use of your vehicle, you must decide whether to deduct your actual expenses or use the standard mileage rate. The standard mileage is easier to calculate and, if the IRS questions the deduction, only requires that you provide a written, detailed log of the miles driven. When deducting actual expenses, gathering the paperwork to substantiate the expenses requires more effort, but deducting the actual expenses on the return may be more beneficial in certain cases. Your The Mobile Tax Man tax prepares can help you determine which method is most advantageous for you.
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Using the Actual Expenses Method
Certain vehicle-related amounts you spend can be used to determine your actual expenses. Vehicle expenses include:
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*Depreciation
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Insurance
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Registration and license plate fees
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Parking fees and tolls
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Garage rent
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Lease payments
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Repairs and maintenance (including tires)
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Gasoline and oil
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Car washes
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*The maximum depreciation deduction allowed may be limited due to the IRS passenger automobile rules.
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Using the Standard Mileage Rate Method
If you elect to use the standard mileage deduction, you may deduct 58 cents for business purposes and job searching (in a related field). If you move to a new home because of a job change, the mileage rate while moving is 18 cents per mile (these miles are deducted on Form 3903, Moving Expenses, if you meet the moving deduction requirements).
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Generally, you can use the standard mileage rate if you are not reimbursed and if your reimbursement is less than the amount calculated using the standard mileage rate.
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You must choose the standard mileage rate or actual expense method the first year you use the vehicle for business purposes. If you choose the standard mileage rate, you can switch to the actual expenses method in a later year. If you use the standard mileage rate for the tax year, you cannot deduct any of your actual vehicle expenses for that year, other than parking, tolls, car rental fees if not reimbursed by your employer, and the business portion of any personal property taxes (if based on the vehicle's value). You must elect to use the standard mileage method the first year the vehicle is available for use in your business. In later years, you can choose to switch methods from standard mileage rate to actual expenses but not from actual expenses to standard mileage rate. If you switch to actual expenses method in a later year, but before your vehicle is fully depreciated, you will have to estimate the remaining useful life of the vehicle and use straight-line depreciation. If you use the standard mileage rate for he tax year, you can't deduct any of your actual vehicle expenses for that year, other than parking, tolls, car rental fees, and the business portion of any personal property taxes. If you use the standard mileage rate method for a vehicle you lease, you must use it for the entire lease period. The non-business portion of personal property taxes are deducted on Schedule A, Itemized Deductions.
You cannot claim the standard mileage rate in the following instances:
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You use five or more vehicles for business at the same time.
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Your employer provides you with a vehicle. In this instance, you might be able to deduct the actual expenses of operating that vehicle for business purposes. The amount you can deduct depends on the amount that your employer included in your income and the business and personal miles you drove during the year.
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You use the vehicle for hire, (such as a taxi)
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You claimed depreciation under any method other than straight-line, a special depreciation allowance, or any section 179 deduction in a prior year.
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You can deduct any additional costs you had for hauling tools or instruments (such as the rental of a trailer you tow with your vehicle). You cannot deduct fines you paid for traffic violations, any amount that is eligible for reimbursement from your employer or, if you are an employee, interest paid on a vehicle loan (this interest is treated as personal interest).
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If the vehicle was used only partly for business, expenses must be allocated between personal and business use. You will usually use a percentage based on miles driven for business purposes during the year over total number of miles driven during the year.
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Not all commuting miles are treated the same for tax purposes and they may not be considered to be for business purposes. Your costs of driving a vehicle between your home and your main or regular place of work are personal commuting expenses and are not deductible, no matter how far your home is from your regular place of work and regardless whether you worked during the commuting trip. For example, if you make business calls on your cell phone while driving or you have a business associate riding with you and you discuss business on the way to work, this does not change the regular commute from a personal expense to a business expense.
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Additionally, if you have a business advertisement on your car or if you haul tools or instruments in your car while commuting to and from work, the regular commute is still considered a personal expense.
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Although regular commuting to and from work is not deductible, commuting miles may count as business use if your home is your office, if you are working out of a temporary location, or if you work in two or more different places during the day.
For example:
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If you have a qualifying home office for your business, the round-trips between your office and your client's place of business.
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You have no regular office and you do not have an office in your home. In this case, the location of your first business contact is considered your office. Transportation expenses between your home and this first contact are nondeductible commuting expenses. Transportation expenses between your last business contact and your home are also nondeductible commuting expenses. Although you cannot deduct the costs of these trips, you can deduct the costs of going from one client or customer to another.
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You regularly work in an office in the city where you live. Your employer sends you to a one-week training session at a different office in the same city. You travel directly from your home to the training location and return each day. You can deduct the cost of your daily round-trip transportation between your home and the training location.
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You do not have a regular place of work but you ordinarily work in the metropolitan area where you live. You can deduct your daily transportation costs between your home and a temporary work site if it is outside that metropolitan area.
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You work at two places in one day. Whether or not you work for the same employer, you can deduct your expense of getting from one workplace to the other. However, if for some personal reason you do not go directly from one location to the other, you cannot deduct more than the amount it would have cost to go directly from the first location to the second.
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Fees you pay to park a vehicle at work or tolls paid to get to work are nondeductible commuting expenses. However, business-related parking fees and tolls are deductible (for example, when visiting a customer, traveling to a temporary work location, attending a seminar, or when looking for a job in a related field) whether you take the standard mileage method or actual expenses method.
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Contact The Mobile Tax Manoffice for more information or assistance. 214-317-9927
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Job-Related Travel Expenses
Note: On the new tax reform starting on year 2018, the business job related deduction is no longer available for federal purposes, unless you need to prepare your State Income Taxes were it is available.
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You might be able to deduct travel expenses if you are an employee who temporarily travels away from your tax home for business purposes. You are traveling away from home if both of the following apply:
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Your duties require you to be away from the general area of your tax home substantially longer than an ordinary day's work.
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You need to sleep or rest to meet the demands of your work while away from home.
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Travel Expenses
For tax purposes, travel expenses are the ordinary and necessary expenses of traveling away from home for a business, a profession, or a job. The following chart lists common deductible expenses you might have when traveling away from home for business purposes.
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Tax Home
For job-related travel expenses, you must be traveling away from your tax home. The following guidelines clarify where your tax home is considered to be:
If there is no place where you regularly live, your tax home is wherever you work. In this case, you cannot claim a travel expense deduction because you are never considered to be traveling away from home.
- Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. The tax home includes the entire city or general area of your place of business.
- If you have more than one regular place of business, your tax home refers to your main place of business.
- If you have no main place of business because of the nature of your work or the circumstances, your tax home may be the place where you regularly live or where your main home is located. Use the following to determine whether your main home can be considered your tax home:
- You perform part of your business close to your main home and you use that home for lodging while doing business in the area.
- You duplicate the living expenses you already have at your main home that you duplicate because your business requires you to be away from that home.
- You have not abandoned the home in which have historically lived and considered your main home, you have members of your family living at your main home, or you often use that home for lodging.
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Temporary Travel
To have qualified job-related travel expenses, you can either be temporarily away from home or on a temporary assignment. You are considered to be temporarily away from home if your duties require you to be away from the general area of your tax home substantially longer than an ordinary day's work and you need to sleep or rest to meet the demands of your work while away from home.
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You will generally be considered on a temporary assignment if you realistically expect it to last (and it does last) for one year or less. Note: If you are a federal employee participating in a federal crime investigation or prosecution, you are not subject to the one-year rule.
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Contact The Mobile Tax Man office for more information or assistance at 214-314-9927
Foreign Tax Credit
If you paid income tax to a foreign country on any type of income such as, interest, dividends, or wages you may be eligible to claim either a credit or an itemized deduction for the taxes paid. You can choose to either claim the taxes paid as a deduction when itemizing deductions or you can claim a credit for the taxes paid. Generally, the foreign tax credit results in a greater tax savings than deducting the foreign taxes as an itemized deduction.
Changed Job Location
You can deduct your moving expenses if you meet all three of the following requirements:
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Your move was closely related to the start of work.
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Your new job is at least 50 miles farther away from your former home than your old job location was from your former home.
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As an employee you must work full time for at least 39 weeks during the first 12 months after you are in the general area of you new job location.
Deductible expenses
If you meet the requirements you can deduct the reasonable expenses of:
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Moving your household goods and personal effects
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Traveling (including lodging but not meals) to your new home.
If you use your car to take yourself, members of your household, or your personal effects to your new home, you can figure your expenses by deducting either:
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Your actual expenses, such as gas and oil for your car, or
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The standard mileage rate is 23 cents per mile in 2015.
Whether you use actual expenses or the standard miles rate you can deduct expenses for parking and tolls you pay during the move.
Had a Second Job
The maximum Social Security taxes or RRTA tier 1 an individual must pay in this year is $8,239.80. If you worked for one employer and paid more than $8,239,80, you must contact your employer for a refund of the overpayment. If you worked for more than one employer and the combined total of your Social Security taxes or RRTA is greater than the maximum amount, you may claim the excess taxes paid as a refundable credit on your tax return.
Lost Job
If you are looking for a job in your current profession and can itemize your deductions, certain expenses may qualify as miscellaneous deductions. Employment agency fees, resume printing, phone calls, and mailing expenses are examples of deductible items. Have you received unemployment compensation during the year? You must report unemployment compensation as income. State and federal unemployment insurance benefits, and railroad unemployment compensation benefits, are all considered taxable income. You can choose to have income tax withheld from any unemployment compensation you receive
Unemployment Benefits
Unemployment compensation generally includes any amounts received under the unemployment compensation laws of the United States or of a state. It includes state unemployment insurance benefits and benefits paid to you by a state or the District of Columbia from the Federal Unemployment Trust Fund. It also includes railroad unemployment compensation benefits, but not worker's compensation.
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Supplemental unemployment benefits received from a company financed fund are not considered unemployment compensation for this purpose. These benefits are fully taxable as wages, and are reported on Form W-2, Wage and Tax Statement.
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Unemployment benefits from a private fund to which you voluntarily contribute are taxable only if the amounts you receive are more than your total payments into the fund. This taxable amount is not unemployment compensation; it is reported as other income on Form 1040, Individual Income Tax Return.
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If you received unemployment compensation during the year, you should receive Form 1099-G, showing the amount you were paid. Any unemployment compensation received must be included in your income.
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If you received unemployment compensation, you may be required to make quarterly estimated tax payments. However, you can choose to have federal income tax withheld. For more information, refer to Form W-4V, Voluntary Withholding Request.
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Used Home Office
Home Office Deduction
A home office will qualify as the principal place of business if you use it exclusively and regularly to conduct administrative or management activities of your trade or business, and if there is no other fixed location of the business where you can conduct these activities. Home office deductions cannot be more than your earned income. If they are higher, you must carry over the nondeductible expenses to the following year. Form 8829, Expenses for Business Use of Your Home, is used to deduct home office expenses for a self-employed person or on Schedule A, Itemized Deductions, if an employee.
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Traditional Method
To use the traditional method to calculate to the Home Office deduction you must keep track of the total square footage of your house and your office space. You can deduct the business percentage of your mortgage interest and real estate taxes or rent, the business percentage of your electricity and gas (if used to heat or cool the house), homeowner’s insurance, home owner’s association dues, and any casualty or theft loss deduction. You can also deduct the business percentage of any repairs or maintenance done on the whole home. In addition, you can claim the total costs of any repairs or maintenance done only to the office space. If you own the home, you will also be eligible for depreciation on the home. Report your Home Office deduction on Form 8829, Expenses for Business Use of Your Home, if self-employed or on Schedule A, Itemized Deductions, if an employee. Any amount of deduction greater than the total income for the year may be carried forward and applied each future year the traditional method is used.
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Simplified Method
The simplified method of calculating the Home Office deduction is a shorter, quicker method of determining the deduction requiring less intense recordkeeping. Taxpayers can claim a deduction of $5 a square foot of qualifying home office space. The deduction is limited to $1,500 or 300 square feet. If you choose this method, you can claim no depreciation or any carryover of prior year unallowed deduction under the traditional method. If self-employed, report the simplified Home Office deduction on Schedule C, Self-Employment Income, Page 2