For information only. Not all tax situations are the same.
Whether you’re working at home to spend more time with your kids or just enjoy working in your bunny slippers, you’ve already discovered the many benefits of working from home.
One benefit that you should take full advantage of at tax time is the home office deduction which allows you to deduct a portion of your home’s costs as a business deduction. To claim the home office deduction, you must have a home office that is used regularly and exclusively for your small business.
Your “home” can be a house that you own, apartment, condominium, mobile home or even a houseboat. You could even deduct your home office if it’s a separate structure like a garage, barn, or studio workshop.
If you have a home office, the three big rules to qualify for the deduction are:
1. You must be using the home office for a business and not just a hobby.
Even if you have a full or part-time job elsewhere, you can use your home office for a side business. For me, my sewing room doesn’t count no matter how many hours I spend quilting in there, but the room I use for my virtual accounting practice does because that’s what I do to earn a living.
2. You must use your home office exclusively for your business.
If you use a spare bedroom in which guests spend the night or the part of your den that your kids use to do their homework, then you don’t qualify for the deduction because the space is not used exclusively for your business. An important point, however, is that you can claim only part of the room for your deduction. So if you have a corner of your den set up with your desk and files and that corner is only ever used for your business, then you can claim that corner!
3. You must use your home office regularly.
It’s not enough to put your desk in a spare room … you actually have to use that room regularly for your business. There’s no clear-cut definition of “regular” in the eyes of the IRS, but you should be safe if you use the home office 12-15 hours per week for your business (per Green v. Comm’r, 79 T.C. 428 (1982)).
Once you have met these rules, you’ll also need to meet any one of the following requirements:
- You meet clients or customers at home.
- Your home is your principal place of business.
- You use your home office for administrative or management activities and don’t have anywhere else where you can perform those activities, such as bookkeeping, setting appointments, and other paperwork.
- You use a separate structure, such as a barn or studio workshop, exclusively for your business.
- You store inventory or product samples at home.
What can you deduct? You’ll be able to deduct a percentage of:
- Mortgage interest and property taxes
- Depreciation (if you own your home)
- Insurance, either homeowner’s or renter’s
- Repairs and maintenance that affects your entire house, such as roof repairs, a new furnace or new siding
- Condo fees
- Security system fees
A lot of business owners have heard horror stories about the home office deduction being a red flag for audits, but this is no longer the case. In fact, there is a push in Congress to simplify the home office deduction so that more taxpayers can claim it! So go ahead and claim the deduction, but be clear on the rules and make sure to save all your receipts! To improve your position in the event of an audit, some extra steps you can take are:
- Draw a diagram of your home office in relation to your house and take a picture of it. This will back up the percentage of expenses that you’re claiming. If your home office is 110 square feet and your home is 1,375 square feet, then you’ll be able to deduct 8 percent of your home’s expenses.
- Encourage your clients or customers to visit your home office and keep a log of their visits.
- Keep a log of the time you spend working in your home office. Even doing this for a month, as a representative sample, can be helpful in the event of an audit.
- Use your home office address on all your advertising and business stationery.
You’ve worked hard to make your small business a success. By claiming all the tax deductions to which you are entitled, you’ll be able to share a little less of your profit with Uncle Sam next year.
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Deb Howard Greenleaf is a virtual accounting & bookkeeping provider who helps consultants, solopreneurs and small business owners with their financial management, taking care of the books so they can focus on their business. She shares tax tips and accounting pointers through her blog, the Small Biz Numbercruncher. A lifelong resident of northwestern Pennsylvania, Deb shares her home with five pets, two young kids and one very patient husband!