Self Employed
Home Office Tax Deduction for Small Businesses
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The home office tax deduction is one of the most utilized write-offs by self-employed and small-business owners during tax season. It allows eligible taxpayers to deduct a part of your rent or mortgage payments due to business use. However, like all business expenses, the IRS puts limitations on how much you can claim or exactly who can claim home expenses. That's why it's important to know how to write off home office deductions correctly when filing your tax return. When done incorrectly, the consequences can be costly.
To help clarify this tax scenario, let's go over everything you need to know about when and how to deduct home office expenses. Here’s a brief rundown on the home office tax deduction for small businesses and self-employed.
Can a home office be tax deductible?
Sure! There are a number of small business owners who regularly work from home rather than drive miles away to a secondary office. Take real estate agents, for example. These sales professionals can take a business call or new listing at any time and place. And many times, it happens while working from home. But in order to qualify for the home office tax deduction, there are a few restrictions that the IRS imposes. Simply having a desk and computer in your house does not make you eligible for a home office deduction.
So before you start making a list of possible home office expense deductions, familiarize yourself with the federal requirements you'll need to meet in order for them to apply. In general, there are two basic requirements for claiming the home office deduction:
- There must be a designated space in your home that serves as your home office on a regular basis. For example, some taxpayers use a spare bedroom in which you conduct a significant portion of your work.
- Qualified taxpayers need to show that your home office is where most administrative and management activities take place or inventory is stored.
You might immediately ask yourself: “Well, what percentage is enough?”. Although the IRS doesn’t specifically summarize the expected ratio of work conducted at home, a good rule of thumb is to perform over 50% of administrative and management tasks from your homebase. In other words, this specific area of your home should be your principal place of business. All things considered, a home office can only be tax deductible if you are self-employed and work a majority of the time from home. Otherwise, the IRS will find fault with taking this type of tax deduction.
What deductions can I claim for home office?
One of the great things about a home office write-off is that taxpayers can deduct the entire amount of a direct home office expense. Now that we’ve clarified who can deduct home office expenses, you might be wondering — “What can I actually deduct?”. Under the home office tax deduction, eligible taxpayers can write-off a portion of mortgage or rent payments, property taxes, utility costs, depreciation (if you own the home), relevant maintenance and repairs, and similar expenses. Keep in mind, you can't deduct the personal use of your home office. The more space that is devoted to your business at home, the greater your overall deduction will be worth.
