As a small business owner, you may be eligible to claim the home office deduction on your tax return. This deduction allows you to claim a portion of your home expenses as a business expense, which can lower your taxable income and save you money on your taxes.
Eligibility
To qualify for a home office deduction, you must meet two threshold tests: the place of business test, and the regular and exclusive use test.
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- To meet the place of business test, you must show that your home is the principal place of business for your trade or business, or a place where you regularly meet with clients, customers, or patients. You must have no other fixed location for conducting these types of activities to qualify.
- The regular and exclusive use test requires you to show that you exclusively use a portion of your home for business purposes on a regular basis.
Calculating the Deduction
There are two methods for calculating the home office deduction: the simplified method and the regular method.
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- The simplified method allows you to claim a flat rate of $5 per square foot of your home office, up to a maximum of 300 square feet.
- The regular method requires you to calculate the actual business use of your home based on factors such as the percentage of your home used for business and the actual expenses incurred.
Deductible Expenses
You can deduct both your direct and indirect expenses regarding your home office. Direct expenses are costs that apply only to your home office. You can deduct these costs in full against your business income.
Indirect expenses are costs that benefit your entire home. You can deduct only the business portion of your indirect expenses. Some examples of indirect costs include rent, deductible mortgage interest, real estate taxes, and homeowners insurance. The business percentage of your home is determined by dividing the area exclusively used for business by the total area of the home.
Know the Risks
Historically, the IRS has closely scrutinized home office deductions. Here are some steps you can take to substantiate the eligibility of your home office:
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- Use your home address on your business cards, stationery, and advertisements
- Install a separate telephone line for your business
- Instruct clients or customers to visit your home office, and keep a log of those visits
- Log the dates, hours spent, and type of work performed in your home office
- Have business mail sent to your home
Overall, the home office deduction can be a valuable tax break for small business owners. Make sure you understand the eligibility requirements and how to calculate and document your expenses to take advantage of this deduction. As always, it’s a good idea to seek the guidance of a tax expert if you have any questions or concerns.
About Tabitha Regan
Tabitha Regan is the Founder and CEO of LittleOwl CPA. She is a Certified Public Accountant, Certified Financial Planner™ and Personal Financial Specialist. In her 16+ year career span, she has developed an expertise in the specific needs of small businesses and busy professionals with accounting, tax and advisory services.
