Calculating business use of home costs so that we can add that amount into the final cost of our finished items is important – but also very tricky.
Many handmade business owners (including myself) sort of work all over the house.
The IRS has some pretty specific rules for taking a business use of home deduction on your income taxes which involves having a dedicated space for your business – but many of us just don’t qualify. This article will discuss how to calculate business use of home so you can include that in pricing your finished items BUT you will need to talk to your tax preparer to see if you qualify for a deduction on your Schedule C or not.
Remember, I am a bookkeeper BUT NOT YOUR bookkeeper and I am NOT a CPA – so I am NOT offering any tax advice!
So, this is how I calculate my business use of home costs in order to include it in pricing my finished handmade items.
First, I start with the total number of hours in a year (24 x 365 = 8760)
Then I total up the annual costs of the things that the IRS DOES allow – see Form 8829 (if you want a headache):
- Property Taxes
- Mortgage or rent
- Homeowner’s insurance
Then, I take that annual total and divide it by 8760 to come up with an hourly value – this hourly value is what it costs you to run your house (and your handmade business) and this is a powerful number!
Once you know that hourly cost for the business use of your home there are a couple of ways that you can recoup those costs.
First, you can take that hourly cost and multiply it by the number of hours you spend on each finished item. That gets you to the Average or Close Enough method of costing that I talked about in my blog post last week on Tracking Costs of Little Parts & Pieces
With this method I’m not only capturing that hourly cost of running my home for every hour that I spend working on Admin stuff (like writing this blog post, doing my own books, attending webinars, etc.) – but I am capturing the cost based on the hours it takes me to complete each project and that is important.
On the flip side – once you know the hourly cost of using your home you can can incorporate that into your fair hourly wage – even if you don’t qualify for the tax deduction – and then you don’t have to worry about making the calculation per project.
For more information about business use of home when you do have a dedicated space in your home for your handmade business, refer to Topic No. 509 Business Use of Home found on the IRS website. If you have questions, feel free to ask in our Facebook group.