Many small business owners who have a home office qualify for a tax deduction. However, many refuse to claim it because they believe it will trigger an audit. If you use part of your home for business, you CAN deduct expenses for the business use of your home, if you meet certain guidelines. The home office deduction is available for both homeowners and renters, and according to the IRS, it applies to all types of homes.
Below are some of the requirements to claim the deduction:
- You must use a portion of your home exclusively and regularly for your business. A home office should be in a separate room or group of rooms, but it can be a section of a room if the division is clear. To qualify, the room should not be used for other purposes.
- Your home office must be either the principal location of your business, or a place where you regularly meet with customers or clients. You must show that you use your home as your principal place of business. However, if you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. You can also deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers.
- There are exceptions for day care facilities and storage. The exclusive-use test does not apply if you use part of your house to provide day care services for children, the elderly or handicapped individuals. If you care for children in your home between 7 a.m. and 6 p.m. each day, for example, you can use that part of the house for personal activities the rest of the time and still claim business deductions. To qualify for the tax break, your day care business must meet any applicable state and local licensing requirements. Another exception to the exclusive-use test applies to a portion of your home used to store product samples or inventory you sell in your business.
Business percentage of house or simplified square foot calculation
Your home office business deductions are based on the percentage of your home used for the business or a simplified square footage calculation. The most exact way to figure this proportion is to measure the square footage devoted to your home office and find what percentage it is of the total area of your home. If the office measures 150 square feet, for example, and the total area of the house is 1,200 square feet, your business percentage would be 12.5% (150 ÷ 1,200). An easier way to calculate this is applicable if the rooms in your home are all about the same size. In that case, you can figure the business percentage by dividing the number of rooms used in your business by the total number of rooms in the house.
For a full explanation of tax deductions for your home office, refer to Publication 587, Business Use of Your Home at http://bit.ly/2fX6y0x.
We hope this post helps to provide some clarification on home office deductions. If you need help managing any aspect of your business’s or nonprofit’s finances, we want to hear from you. Call us at (301) 913-0008 or email firstname.lastname@example.org to make an appointment.