You can begin by calculating what percentage of the house is used for business, either by number of rooms or by square footage. Thus, if you use one of five rooms for your business, the business portion is 20 percent. If you run your business out of a room that's 10 by 12 feet and the total area of your home is 1,200 square feet, the businessspace factor is 10 percent. An extra computation is required if your business is a home daycare facility. Check with your tax preparer and the IRS for an exact determination.
Homeowners can take a deduction based on the depreciation of the business portion of their house.
There is a limit to the amount of business expense you can deduct from your federal income tax. This is equal to the amount of gross income generated by the business minus those home expenses you could deduct even if you weren't operating a business. For example, real estate taxes and mortgage interest are deductible regardless of any business activity in your home, so you must subtract from your business' gross income the percentage that's allowable to the business portion of your home. You thus arrive at the maximum amount for homerelated business deductions. The IRS emphasizes that claiming home business deductions does not automatically trigger an audit of your tax return.