SMALL BUSINESS AND SELF-EMPLOYMENT TAX TIPS: THE HOME OFFICE DEDUCTION

If you are like many small business owners, your home isn’t just where you live, it is where you work too. Now more than ever, many small business owners are choosing to embrace the flexibility that comes with working from home. If this sounds like you, you may be entitled to take the Home Office Deduction for your small business.

What is it?

The home office deduction allows taxpayers to deduct certain home expenses when they work from home.? As a quick overview, a taxpayer’s expenses must first qualify for the deduction.? Then you can choose between deducting actual expenses or using the simplified method to calculate your deductions.

Eligibility

To start off, employees cannot claim the home office deduction.? So, for all you remote workers out there who get a W-2 from your employees, you’re out of luck with this one.? But independent contractors and business owners are eligible.

To qualify for the Home Office Deduction, your workspace must meet two crucial elements: 1) regular and exclusive use and 2) principal place of business. Shockingly, “regular and continuous use” means pretty much what you would think it means.?

Regularly means you consistently use a specific area of your home for your business activities. Exclusive means that this area is solely dedicated to your work.? So, it can’t be your dining room table that you work off when you and your family aren’t eating a meal.

As for the second element, you have to show that your home is your principal place of business. This doesn’t mean that you don’t conduct any business outside of the home, it just means your home office is the operation center of your business.? It’s not too complicated but let me give you an example.

If you have in-person meetings with patients, clients, or customers in your home during the normal course of your business, you can still carry on business in other locations such as a lunch or networking meeting.? What matters is that your home office is the epicenter of your business activities.? So, if you regularly and exclusively use your home office for business purposes, and it is your principal place of business, you are eligible to claim the home office deduction.

Which Method Should I Use?

Now that you qualify, which method should you use to claim your home office deduction?? Well, depends on which one gives you a bigger deduction.? The IRS allows you to choose between claiming your actual expenses and using the simplified method.?

Generally, deducting actual expenses would give you a bigger deduction, but you can’t know for sure unless you crunch the numbers.? Here are how these two methods are calculated.

Actual Expenses

If you use the actual expenses method to claim your home office deduction, you first need to know which expenses can be deducted.? Your expenses need to be, in some way, related to the use of your home office.? For example, painting, repairs, insurance, utilities, real estate tax, mortgage interest, etc. are related to your home office because, without those expenses, you cannot maintain your home office.??

On the other hand, things like lawn care or painting a separate room in your home are not related to your home office and are not deductible expenses. But we’re not done yet. After you figure out what is deductible, you have to separate your expenses into direct and indirect expenses.?

Direct expenses are costs that you spent only on your home office, such as painting, or repairs only done in the home office.? Indirect expenses are costs that you spend on the whole house but still help you maintain your home office.? These are things like insurance, mortgage interest, utilities, or general repairs.

For indirect expenses, you have to determine how large your home office is compared to the rest of your house and apply that percentage. For example, if you have a 300K square foot home but your home office is only 30K square feet, your home office is 1/10th of your home.? You can then deduct 1/10th of all your indirect expenses.

However, there is something important that you need to consider.? Some of these deductions also coincide with itemized deductions that you can claim as a homeowner.? Be careful not to double claim these expenses on your personal return and on your business return. The IRS doesn’t like it when you “double dip”.

You will need to choose on which return you want to claim them, and which will give you a better deduction.? This can get a little complicated, so I would suggest talking to a tax professional about this if you have a complicated case.

Simplified Method

Something else I would recommend talking to a tax professional about is which method you should use to claim your home office deduction.? As it sounds, the IRS offers a simplified option for claiming the Home Office Deduction which allows you to skip any complex calculations. With this method, you deduct $5 per square foot of your home office, up to 300 square feet.

Again, this method might provide a straightforward way to claim your deduction while reducing the risk of errors, but it might not be the best choice for you.? Talking to a tax professional can help you consider whether you should itemize your deductions on your personal return, claim the actual expenses for your home office, or use the simplified method.?

Navigating the intricacies of the Home Office Deduction can be challenging. Tax laws are subject to change, and understanding how to maximize your savings requires expertise. Consulting a tax professional, CPA, or tax attorney can help you ensure you stay in compliance with the current tax law.

Salt Lake City, UT Location | Law Office Of Pietro Canestrelli (ietaxattorney.com)

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