Tax deductions

Home office tax deductions for small businesses

Small business owners and entrepreneurs who work from home could save a lot of money on their taxes by taking the home office deduction, as long as they meet IRS requirements and keep good records.

If you use part of your home regularly and exclusively for business activities, the IRS allows you to deduct rent, utilities, property taxes, repairs, maintenance, and other related expenses.

Here’s what small businesses need to know about the home office deduction.

Who is eligible for the home office deduction

You can claim the deduction whether you own or rent, and you can use it for any type of home you live in: a single-family home, apartment, condo, or houseboat. You cannot use it for a hotel or other temporary accommodation.

The home office deduction rules also apply to freestanding structures. You can use a studio, garage, or barn as a home office as long as the structure meets the “exclusive and regular use” requirements.

Here are the conditions you will need to meet:

Regular and exclusive use: The space you use for business must be used exclusively for conducting business. For example, using a spare bedroom as both an office and a playroom for your children probably makes you ineligible.

There are two exceptions. If you provide child care, seniors (65 or older), or disabled care in that part of the home, you can probably still claim business deductions, as long as you have a license, certification, or an approval as a day care center under state law, according to the IRS. The other exception is if you use the office for storage of inventory or samples of products you sell in your business.

Main place of business: While your home office shouldn’t be the only place you meet your clients, it should be your main place of business. This means that you use the space exclusively and regularly for administrative or management activities, such as billing clients, booking appointments, and maintaining books and records, according to the IRS.

Pricing: $47.95 to $94.95 plus state fees.

Pricing: $60 to $120 plus state fees.

Pricing: $49.99 to $109.99 plus state fees.

How to determine your home office deduction

You can determine the value of your deduction in a simple or difficult way.

  • With the simplified option, you do not deduct actual expenses. Instead, the square footage of your space is multiplied by a prescribed rate. The rate is $5 per square foot for up to 300 square feet of space.

  • the more difficult regular method values ​​your home office by measuring actual expenses against your overall residence expenses. You can deduct mortgage interest, taxes, maintenance and repairs, insurance, utilities, and other expenses.

You can use Form 8829 to determine the expenses you can deduct.

Simplified version vs deduction of actual expenses

The choice to use the simplified deduction, if you are entitled to it, or to deduct the actual expenses depends mainly on which would bring you the largest tax deduction.

The actual expenditure method

If you use the actual expense method, you can fully deduct direct expenses, such as painting or repairs done only at the home office. Indirect expenses—mortgage interest, insurance, utilities, property taxes, general home repairs—are deductible based on the percentage of your home used for business purposes.

See what else you can do for your business

Example: Let’s say you paid $3,000 in mortgage interest, $1,000 in insurance premiums and $3,000 in utilities (all indirect expenses) plus $500 for a paint job at the home office (direct expenses ) during the year. Your home office takes up 300 square feet in a 2,000 square foot home, so you may be eligible to deduct indirect expenses on 15% of your home.

This could mean a deduction of $1,050 in indirect expenses ($7,000 in expenses, multiplied by the 15% space used in the house), plus $500 for direct home office painting expenses, for a deduction total of $1,550.

The simplified version

If your home office is 300 square feet or less and you elect the simplified deduction, the IRS allows you a deduction of $5 per square foot of your home used for business purposes, up to a maximum of $1,500. $ for a 300-square-foot space.

In this case, using the simplified method might make more sense, because you would only get $50 more in deductions by documenting the actual expenses. You should also consider how long it will take you to collect receipts and records.

  • The simplified method can work well for one-room offices and small operations.

  • The actual expense method might work better if the business is a large portion of the home.

Things to watch out for

  • Received. If you plan to deduct actual expenses, keep detailed records of all business expenses you expect to deduct, such as receipts for equipment purchases, electric bills, utility bills, and repairs. If you ever get audited by the IRS, you’ll be prepared to back up your claims.

  • Anxiety. Don’t let the fear of an audit keep you from taking advantage of the home office deduction.

  • Home sales. If you are a homeowner and claim the home office deduction under the actual expense method, this could negate your ability to avoid capital gains tax when selling your principal residence. According to IRS Publication 523.

  • Depreciation. If you use the actual expense method, you must depreciate the value of your home. Depreciation refers to a income tax deduction that allows taxpayers to recover property costs, due to wear and tear, deterioration or obsolescence of the property, according to the IRS. The depreciation you must take in home office deductions is subject to capital gains tax when you sell your home. For example, if you own your home, use 20% of it as a home office, and deduct depreciation, 20% of your profit on the sale of the home may be subject to capital gains tax. -values. However, if you use the simplified method, depreciation is not a factor and you may not be subject to tax.

The tax deduction rules for a home office can be hard to digest. Consult a tax advisor or use the appropriate online tax software if you are unsure how to proceed.