Not only is rent tax-deductible, but indirect expenses for the upkeep of the home are deductible as well. These expenses include utilities like gas, electric and water, renter and equipment insurance, and garbage and cleaning services. It is important to keep records, statements, figures used for calculating area, receipts and other supporting documentation to substantiate claims for deductions.
If you meet patients, clients or customers, carry out administrative and managerial tasks, or store inventory at your own home, you may deduct rental and household business expenses. Administrative and management duties include bookkeeping, record keeping, billing, ordering supplies, setting up appointments and writing reports.
If you are self-employed, use Form 8829, Expenses for Business Use of Your Home. If you work for an employer, you may need to file Form 2106, Unreimbursed Business Expenses, and itemize these deductions on Form 1040 Schedule A, for any amount exceeding 2% of your adjusted gross income. You cannot deduct personal expenses. For daycare facilities, unless exempt, you must have a state-approved license and certifications and meet state and local laws in your area.
With the exception of inventory storage and daycare facilities, the area must be used exclusively for business. All areas must be used regularly for business; you must have no other location to conduct business. The business portion of rent must be prorated according to the total living area, calculated by dividing business square feet by total area. For daycare, the area is further prorated according to the time it is used for business, by dividing hours the area is used for day care over the total number of hours per year.
Rent paid on facilities where you conduct business as well as taxes paid on leased property are tax-deductible as rent. This includes leasing retail, office and manufacturing space. Rent and and leases paid on facilities are not normally prorated.
Example: Home Office and Storage
You rent a 2000-square-foot house. You use an entire 120-square-foot room to store inventory and use a, 80-square-foot portion of your family room as an office. You use 200 square feet, or 10% of the home, for business use -- 200/2000. The monthly bills include rent of $700, utilities of $200, insurance of $50 and garbage service of $50. The rent and indirect expenses total $12,000 per year; so you can take a $1,200 deduction for business expenses for your home -- $840 for rent and $360 for utilities and insurance.
Example: Daycare Facility
You rent for a daycare business, using the kitchen, living room, dining room and a bedroom. The annual cost of rent and indirect expenses is $12,000 The total area is 800 square feet; it is used 10 hours per day, five days per week. The percentage of area you use for business is 40%. The rooms are used 29.7% of the time -- 2,600 hours/8,760 hours in a year. Multiply the area by the time it is used: 40% X $29.7% = 11.88%. The total deduction for daycare use of your home is $12,000 x 0.1188 = $1,425.60.
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