Factors Affecting Deduction Amount

April 13, 2006

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Once you've determined that you qualify for the home office deduction, you can determine the amount that you can deduct.

This amount depends on a surprisingly large number of factors. But don't be alarmed - we'll explain them all to you, and then provide you with a calculator you can use to quickly estimate the dollar amount of your deduction.

First, you need to know what you spent for each component of the home office deduction:

rent if you don't own the home
mortgage interest and real estate taxes if you own the home
depreciation if you own
insurance, utilities and services, repairs, and decorating whether you own or rent
casualty losses whether you own or rent

Of course, for all these expenses, you can only deduct the portion that pertains to your home office, not the full amount that applies to the entire residence. There are two factors to consider in determining the "home office portion:"

space: the size of the area that was used
time: the portion of the year that the home office was used, if not the entire year

Finally, some business owners will find that their home office deduction is limited by their business income. The tax law states that the home office deduction, plus all your other deductible business expenses, cannot exceed your business income for the year. In other words, the home office deduction cannot be used as a tax shelter to offset other income you (or your spouse) may have.