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Effective: December 1, 2006 |
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20.25.20.15ar1 - Use of Home (Archive) |
Archived: February 1, 2010 |
For MA and GAMC, a self-employment business which operates from the client’s home, can use a business expense for the actual costs for the portion of the home used exclusively for the business.
Determining Costs without Records.
Allowable deductions for business use of the home include:
l Rent.
l Real estate taxes and insurance.
l Interest on mortgage.
l Utilities.
l Repairs made to specific areas of the home used for business.
Determining Costs without Records
To determine the business expense deduction for use of the home, use self-employment business and shelter costs provided by the client to determine the actual costs of using the home as a business.
If records are not available use either of the following to determine the costs:
l The client’s tax records.
l A reasonable ratio to determine the amount to allow as a business expense.
To determine the ratio:
1. Total the number of rooms in the house or the square footage of the house.
2. Total the number of rooms used for business or the square footage used for business.
n Count rooms used for inventory storage even if the client does not use those areas exclusively for the business.
m To allow this the home must be the client’s only work station.
m Base the deduction on square footage.
n Count rooms used for in-home child care even if the client does not use those areas exclusively for the business.
m The day care must be licensed for child care or exempt from licensing.
m Base the deduction on square footage of the house used for child care and the proportion of time the household uses the area for child care.
m See In-Home Day Care for more specific information.
3. The ratio is the number in Step 2 compared to the number in Step 1. Prorate expenses based on this ratio to arrive at the allowable business expense deduction.
Deb is a licensed child care provider. Her home has 2,000 square feet. She uses 1,000 square feet, for child care 50 hours per week. Deb's family also uses the portion of the home used for child care.
Deb pays $1500 each month for her mortgage. $300 each month for insurance. $75 each month for electricity.
Action:
1. The square footage of the home is 2,000 square feet.
2. The portion the square footage used for child care is 1000 square feet or 50% of the total square footage.
l Deb uses that 50% of the house’s square footage, 30% of the time:
7 days/week X 24 hours/day = 168 hours/week.
50 hours divided by 168 hours = 30% of the time.
l 15% of the allowable costs listed as a business expense can be used as a deduction:
30% multiplied by 50% = 15%.
3. Allow the following deductions from Deb’s gross self-employment income:
$225 for the mortgage ($1500 X .15).
$ 45 for the insurance ($300 X .15).
$11.25 for the electricity ($75 X .15).