Maybe you have a home business but are new to understanding how all the deductions work. Or perhaps you have been playing this game for a long time. Either way, the IRS has a way of changing the rules now and then. It can all be very frustrating.
As you start to think about closing the books on 2020, the following information concerning deductions for home office space and travel expenses might be useful for newcomers and those who have been around awhile. Let’s take a look.
New method available for home business deductions:
There are two types of home business deductions: the Simplified Method and the Traditional (Standard) Calculation. The Simplified Method is the IRS’s newest announcement as an easier way for home businesses to file. This method was most likely created because 2020 has been the year of “working from home,” and people should claim their dedicated workspace or office on their taxes.
Simplified Method:
You can deduct $5 per square foot of your home used for business—up to 300 square feet. This method is an excellent option to skip all of the calculations required when using the Traditional Method. While you will still need to track expenses, the Simplified Method requires much less record-keeping for home office deductions. However, if you choose this option for filing, you will not be able to claim the depreciation deduction.
Traditional Calculation:
This method is also sometimes called the Standard Method. If you plan to utilize this procedure, you must track all actual expenses of maintaining your home: mortgage, interest, rent, utilities, real estate taxes, housekeeping, landscaping, homeowner association fees, repairs, etc. Then, multiply them by the percentage of your home devoted to business use. This method requires a Form 8829 in addition to a Schedule C.
Qualifications:
To qualify for the home office deductions, you will need to hit these two criteria:
- The space must be used regularly and exclusively for work. The area does not have to be an entire room, but it does need clear boundaries that set it apart from the rest of the room. It is recommended that you keep photos of your home office space with your tax documentation as evidence if the IRS selects your return for audit.
- The home office space must be your principal place of business, and you spend most of your work time there conducting business activities.
Types of home office expenses:
- Direct Office Expenses refer to items used solely in the part of your home used for work. These expenses include things such as office furniture and necessary repairs, including painting. Direct costs are 100-percent deductible.
- Indirect Expenses refer to the maintenance of your entire home and include costs such as insurance, utilities, security, real estate taxes, etc. You can deduct these items based on the percentage of your home used for your business. For example, if 10-percent of your home’s total square footage is dedicated business space, you can deduct 10-percent from expenses like those listed above.
Deductions for renters:
If you rent your home, you can deduct a percentage of the monthly rent and other expenses—such as utilities and renter’s insurance—equal to the percentage of square footage used as dedicated business space.
Travel expense deductions:
In most cases, you can deduct business-related expenses for travel to and from your home-based business. If your vehicle is used solely for work, you can deduct the entire cost of operation. However, if your car is used partially for business, you can only deduct those parts.
A deductible business trip must be one outside of your Tax Home. Tax Home refers to the entire area where you conduct your business. In most cases, a trip outside of this area would require lodging. The following is a list of 100-percent deductible travel expenses for businesses away from your tax home:
- Travel to and from: plane, rail, car rental, gasoline
- Meals
- Lodging
- Tips
- Parking
- Tolls
- Taxies or other transportation
- Dry cleaning
- Business calls
- Shipping costs of business materials
Travel expense deduction methods:
- Standard Mileage Rate: People who use their car for business should track business miles driven for the year and multiply by the standard mileage rate. The current rate is $0.58 per mile.
- Actual Expense Method: People using this method must track all expenses for the year: gas, oil, repairs, tires, insurance, registration fees, lease payments, etc., and multiply by the percentage of the miles driven for business.
While the Actual Expense Method needs much more extensive record-keeping and tracking, the Standard Mileage Method will also require you to keep a mileage log. With both methods, document the miles, time, place, and purpose of the trip.
Limitations:
The sum of these deductions does have a limit, however. You can deduct business expenses to rescue your income for the year, but you cannot take these deductions if the result is a business loss.
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