There are many home expenditures that can used for an office in home deduction if your business qualifies for the deduction. Let's take a look at some of the rules.

So what household expenses are deductible? To make this determination it is necessary to separate your household expenses into three categories;

1) Expenses that are not related to your business use.

2) Expenses that are indirectly related to your business.

3) Expenses that are directly related to your business.

Let's eliminate one category right away. Expenses that are totally unrelated to your business are not deductible, therefore these expenses need to be treated as personal expenses. In general I would state that all expenses directly related to your business would be deductible. In addition, the portion of related expenses that are not directly related would be deductible. I might caution you that because of limits placed on deductions for expenses that pertain to your business, you may find that even directly and indirectly related expenses could be disallowed. I won't go into this here, but you could research what limits are placed on deductions to make a determination in your situation.

I should explain what a directly related expense is. These would be the expenses incurred in your home that benefit only the business portion of your home. This would be for the area used exclusively for your business, and only for the business area. An example would be new carpet only in the area used exclusively for business, or painting the area.

Directly related expenses are fully deductible but are subject to a limit based on the gross income of the business . If a direct expense is for the purchase of property that will be used for more than one year (furniture), the cost must generally be depreciated over a number of years.

Ok now let's discuss indirectly related expenses. These expenses are the ones that you have in just running your entire home.

These expenses benefit both your business and personal portions of the home. You may use the business portion of these expenses to calculate the home office deduction. Indirect expenses include such items as: 1. Real estate taxes;

2. Deductible mortgage interest;

3. Rent;

4. Utilities and services;

5. Insurance; and

6. Depreciation.

Special rules apply to determine the deductible amount of some indirectly related expenses. You should research these special rules.

Expenses for utilities and services (e.g., electricity and trash removal) must be allocated between the deductible business portion and the nondeductible personal portion of the expense. You will base the business portion of these expense on the percentage of your home that you actually use for business.

The basic local telephone charge, including taxes, for the first telephone line into your home is a nondeductible personal expense So if you only have one telephone line into your home, you may not claim any deduction for charges that are required to obtain local telephone service, even if you are able to prove that the line is used 100% for business reasons. If you can establish a business purpose, then some optional services such as three-way calling and call-forwarding are deductible. In addition, charges for long-distance calls or payments for a service that permits you an unlimited number of calls to or from persons that live outside your local area are deductible, even if they are on the first telephone line, provided that you establish a business purpose for them.

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