Structuring Home Office Expenses For Multiple Businesses

how to structure home office expense for two businesses

Working from home comes with many benefits, from avoiding long commutes to having the freedom to set your own hours. Another advantage is the ability to deduct home office expenses on your tax return. However, when it comes to running two or more businesses from your home office, special rules apply when claiming these deductions. In order to qualify for the home office deduction, you must designate a specific area in your home exclusively for business use, ensuring it is not utilised for any personal activities or storage. This dedicated workspace must be the principal location for both of your business activities, allowing you to claim deductions for expenses such as mortgage interest, insurance, utilities, repairs, and rent. To calculate the amount you can deduct, you can choose between the regular method, which involves dividing expenses based on the percentage of your home devoted to business use, or the simplified method, which offers a prescribed rate per square foot of your home office.

Characteristics Values
Home office deduction eligibility The home office must be the principal place of business for both businesses
Home office usage The home office must be used exclusively for business purposes and cannot be used for personal activities or storage
Claiming the deduction File a separate Form 8829 for each business
Calculating the deduction Divide expenses between the two businesses based on space or time usage; use the simplified method with a maximum of 300 square feet for all businesses combined

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Deducting expenses for two businesses

If you run two businesses from your home, you can claim a home office deduction for both businesses. However, there are specific rules you must follow. Firstly, you must have a dedicated workspace in your home for an office. This area cannot be used for any personal activities. To claim the deduction for two different businesses, the office space must be the principal place of business for both.

To qualify for the deduction, you must designate a specific area in your home as a home office. This can be a room or just part of a room, as long as the area has an "identifiable space". If you use the office for two separate business activities, it must be the principal place of business for both activities, or you cannot take the deduction for either. For example, if you have a design studio in your home and earn extra income doing freelance work, you can take a deduction for the studio. However, if you also use the studio for work related to your regular job, you cannot claim the deduction for either activity.

If both businesses meet the criteria for a home office deduction, you must file a separate Form 8829: Expenses for Business Use of Your Home for each business. To deduct home business expenses, divide the expenses between the two businesses based on how much you use your home office for each. You must manually divide your office space and enter it as if you had two separate offices. The total square footage submitted for each business cannot be more than the total square footage you would submit if you only had one home business. You can choose to divide your space based on time or space usage.

There are two methods for calculating your home office deduction: the regular method and the simplified method. The simplified method uses a prescribed rate of $5 per square foot of the portion of the home used for business, up to a maximum of 300 square feet. Under this method, depreciation is treated as zero, and the deduction is claimed directly on Schedule C (Form 1040). The regular method involves dividing expenses between personal and business use. Direct business expenses can be deducted in full, and indirect total expenses are allocated based on the percentage of home floor space used for business.

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Claiming a home office deduction

If you run two businesses from your home, you can claim a home office deduction for both businesses. However, there are rules to be aware of.

Firstly, you must have a dedicated workspace in your home for an office. This area cannot be used for personal activities. To claim it for two different businesses, the office space must be the principal place of business for both.

To qualify for the deduction, you must designate a specific area in your home as a home office. This can be a room, or just part of a room, as long as the area has an "identifiable space". If you use the same office space for two separate business activities, the home office must qualify as your principal place of business for both activities. If you use the office for one business activity and a separate, unrelated activity (e.g. your regular job), you cannot claim the deduction for either.

If both businesses meet the criteria for a home office deduction, you need to file a separate Form 8829: Expenses for Business Use of Your Home for each business. To deduct home business expenses, divide the expenses between the two businesses. You can base the split on how much you use your home office for each business. You have to manually divide your office space and enter it as if you had two separate offices. The total square footage submitted for each business can’t be more than the total square footage you would submit if you only had one home business. You can choose to divide your space based on time or space usage.

You can also use the simplified method for your home office tax deduction. If so, you’re limited to a maximum of 300 square feet for all your businesses combined. Divide the 300 square feet among your businesses in a logical way. Don’t give more square feet to a business than you actually use for that business.

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Splitting deductions between two people

When splitting deductions between two people, there are several factors to consider. Firstly, ensure that the home office space qualifies as the principal place of business for both people's activities. If not, neither of you can claim the deduction. Secondly, if you are using the same space for your activities, you can split the deduction between the two of you. This can be done by dividing the expenses between the two businesses based on space or time usage.

When dividing expenses based on space usage, calculate the percentage of your home that each person's workspace takes up and use these figures when determining your deductions. If you are using the same space, you can split the deduction equally between the two activities. Alternatively, you can choose to divide the space based on time usage, taking into account how much time each person uses the space.

It is important to note that the total square footage submitted for each business cannot exceed the total square footage you would submit if you only had one home business. Additionally, you must ensure that the area claimed as a home office has an identifiable space and is not used for any personal activities or storage.

You must also file a separate Form 8829 for each business activity. If you opt for the simplified method, you are limited to a maximum of 300 square feet for all your businesses combined. Divide this space among your businesses logically, ensuring that you do not allocate more square feet to a business than you actually use.

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The 'exclusive use' test

To qualify for the home office deduction, you must meet the exclusive use test. This means that a specific area of your home must be used only for your trade or business. The space can be a room or any other separately identifiable space. It does not need to be marked off by a permanent partition. However, if you use the area for both business and personal purposes, you do not meet the requirements of the exclusive use test.

For example, if you are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns, and your family also uses the den for recreation, you cannot claim a deduction for the business use of the den as it does not meet the exclusive use test.

There are exceptions to the exclusive use test. You do not have to meet this test if:

  • You use the part of your home for the storage of inventory or product samples.
  • You use the part of your home as a daycare facility.

Additionally, to qualify for the home office deduction, you must be a registered business owner or independent contractor. You cannot take the deduction if you simply work from home as an employee of a business.

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Two methods to calculate home office expense deduction

There are two methods to calculate the home office expense deduction for two businesses: the simplified method and the actual expenses method.

Simplified Method

The simplified method is a straightforward way to calculate the deduction. It involves multiplying the square footage of your home office space by a prescribed rate. The rate is $5 per square foot for up to a maximum of 300 square feet. So, if your home office space is 200 square feet, you can deduct $1,000 from your taxable income. This method is less burdensome for taxpayers as it simplifies the calculation and record-keeping requirements. It treats depreciation as zero, and the deduction is claimed directly on Schedule C (Form 1040).

Actual Expenses Method

The actual expenses method, also known as the regular method, is more complex. It involves dividing expenses between personal and business use. Direct business expenses, such as painting or repairs solely in the home office, can be deducted in full. Indirect expenses, such as mortgage interest, insurance, utilities, and real estate taxes, are deductible based on the percentage of your home used for business. For example, if your home office takes up 20% of your total home space, you can deduct 20% of your indirect expenses. This method requires more detailed record-keeping, such as keeping receipts for equipment purchases, utility bills, and repairs.

Choosing the Right Method

The choice between the two methods depends on which would result in a larger tax deduction. The simplified method is generally recommended for single-room offices and small operations, while the actual expenses method may be more advantageous if the business occupies a larger portion of the home. Additionally, the time and effort required to gather receipts and records may be a factor in deciding which method to use.

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Frequently asked questions

The home office deduction allows you to deduct expenses for the part of your home that you use for business. This includes mortgage interest, insurance, utilities, repairs, maintenance, depreciation, and rent.

To qualify for the home office deduction, you must use part of your home exclusively and regularly as your principal place of business. This means that you cannot use the space for any personal activities or storage. Additionally, you must be a registered business owner or independent contractor to take the deduction.

There are two methods to calculate the home office deduction: the regular method and the simplified method. The regular method involves dividing expenses between personal and business use, while the simplified method uses a prescribed rate of $5 per square foot of the portion of the home used for business, up to a maximum of 300 square feet.

If you have two businesses, you can still take the home office deduction. However, the office space must qualify as the principal place of business for both businesses. You will need to file a separate Form 8829 for each business and divide the expenses between the two businesses based on how much you use your home office for each one.

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