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ARTICLE

Business Expenses Vs. Personal (USA)


Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.

For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can generally deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is generally not deductible. See chapter 4 for information on deducting interest and the allocation rules.


Business use of your home. If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. To qualify to claim expenses for the business use of your home, you must meet both of the following tests.

  1. The business part of your home must be used exclusively and regularly for your trade or business.

  2. The business part of your home must be:

    1. Your principal place of business;

    2. A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business; or

    3. A separate structure (not attached to your home) used in connection with your trade or business.

You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility. Your home office qualifies as your principal place of business if you meet the following requirements.

  • You use the office exclusively and regularly for administrative or management activities of your trade or business.

  • You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.

If you have more than one business location, determine your principal place of business based on the following factors.

  • The relative importance of the activities performed at each location.

  • If the relative importance factor does not determine your principal place of business, consider the time spent at each location.


Optional safe harbor method. Individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. This method is an alternative to the calculation, allocation, and substantiation of actual expenses. The deduction under the optional method is limited to $1,500 per year based on $5 per square foot for up to 300 square feet. Under this method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A (Form 1040). You are not required to allocate these deductions between personal and business use, as is required under the regular method. If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. All of the requirements discussed earlier under Business use of your home still apply. For more information on the deduction for business use of your home, including the optional safe harbor method, see Pub. 587.

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