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Question: 
I operate my business out of my home. Can I deduct part of my house payment? Are there any other expenses that I can deduct related to my house?

Answer: 
Your question relates to the Home Office Deduction, and if you meet certain tests, a portion of the expenses related to the cost of your housing may indeed be deductible as a business expense. As a self-employed person, you can take a limited deduction for the business use of your home, if you use part of your home exclusively and regularly. 

The first test of course is that you must use your home in connection with a trade or business to take a deduction for its business use. If you use your home for a profit-seeking activity that is not a trade or business, such as buying and selling stocks or managing rental property, you cannot take a deduction for its business use. The term personal residence (or home) includes a house, apartment, condominium, mobile home, or boat. It also includes structures on the property, such as an unattached garage, studio, barn, or greenhouse.

The second test requires “Exclusive Use” which means only for business. This is perhaps the most difficult test for many small-business owners to meet. If you use part of your home as your business office and also use that part for personal purposes, you do not meet the exclusive use test. For example, as an advertising consultant you use a den in your home to write ad campaigns for one of your clients. You also use the den for personal purposes - TV, games, general family activities, etc. Since the den is not used exclusively for business, you cannot claim a deduction for using it.

You must also use the space regularly. To qualify under the regular use test, you must use a specific area of your home for business on a continuing basis. You do not meet the test if your business use of the area is only occasional or incidental, even if you do not use that area for any other purpose. 

In order to determine the amount of the home office deduction, first you must calculate the “business percentage” use of your home for business purposes. The business percentage is calculated by dividing the area (in square feet) used exclusively for business by the total area (in square feet) of your home. If the rooms in your home are about the same size, you can also figure the business percentage by dividing the number of rooms used for business by the number of rooms in the home. You can also use any other reasonable method to determine the business percentage. The square footage method, in our opinion, is the preferred method. For example, if your home has 2,000 total square feet and the office that you use exclusively and regularly for business is 200 square feet, then the business percentage use of you home would be 10% (200 divided by 2000).

Once the business percentage is calculated, the percentage is applied to the indirect expenses to determine the actual deductible portion of the indirect expense. Indirect expenses could include items such as electricity, telephone, heating and cooling, cleaning, interest, real estate taxes, depreciation, etc. For example if your home office represents 10% of the total square feet of your home, then 10% of your electric bill could be deductible, as well as all of the other indirect expenses. Your house payment can be a bit more complicated since a portion of the payment is related to the principle payment on the mortgage, which would not be a deductible expense. Remember, direct expenses of your business, such as a second phone line that is exclusively used for business, are fully deductible subject to the overall limitations. 

The detailed calculation and reporting of the Home Office Deduction is included on IRS Form 8829, Expenses for Business Use of Your Home and is attached to your personal tax return along with the applicable Schedule C.

The IRS has a very good publication to help you with this information, called Publication 587, Business Use of Your Home. You can download the publication from the IRS for free from their Web site

http://www.irs.ustreas.gov/plain/forms_pubs/pubs.html 

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