How to Qualify and Claim Deductions for Your Home Operation
Your home-based business has a unique set of tax issues. You can claim all of the standard business tax deductions, but some apply differently to home-based firms, and some are unique to working from home.
Qualifying for a Home Business Tax Deduction
There are two types of deductions that your home business can take: standard deductions that any firm can use, and deductions that you must qualify for as a home business.
The principal home business expense is for your business space, which is deducted in two steps. Because you are conducting business from your home, you must demonstrate that the place you are using is:
Your primary business location
Being used entirely for your business on a regular basis
Principal Place of Business
You must first satisfy the IRS requirement that your home is your principal place of business before you can start using those tax deductions for your home business.
It’s simple to prove that your house is your primary business location if it’s your only location. You must be able to demonstrate that you have no other permanent location where you undertake administrative or management tasks such as paying bills, managing your business finances, and communicating with workers, suppliers, and customers.
However, if you operate from home as well as an office or other location, you must consider two factors:
The relevance of the operations carried out at each place.
How much time do you spend at each location?
“You cannot deduct expenses for the business use of your home if the use of the home office is merely acceptable and helpful,” the IRS warns.
Regular and Exclusive Use
You must meet both of the conditions for utilizing your home regularly and exclusively for business purposes, in addition to ensuring that your house is your major place of business.
Both of these variables are taken into account by the IRS when assessing whether you can deduct home business expenses on a case-by-case basis. You must be able to prove that your house is your primary place of business and that you utilize it for business activities on a regular and exclusive basis. Keep track of what you do for your business at home (work on the computer, speak with clients) and how much time you spend at home versus in the office.
How to Calculate Your Home Office Space Deduction
The IRS permits you to deduct the cost of the space in your home that you use for business purposes in one of two ways:
The traditional method, which involves determining real expenses.
A simple multiplication procedure is used in this simplified strategy for tiny business regions.
Both strategies are focused on a certain part of your home that you utilize for business on a regular basis. This area could be an entire room or only a section of one. You’ll need to calculate the square footage of the area used for business purposes with either technique.
Actual Expenses Method
The most typical method for calculating the deduction is to match the size of your home’s commercial area to the total size of your home. You can split the overall square footage of your property by the square footage of the area used for your business.
After you’ve calculated the proportion, go over a list of home expenses you can deduct and apply the percentage of business space to those costs. This method of calculation distinguishes between direct and indirect charges.
Direct expenses only apply to the business section of your home, and you can deduct 100% of these costs. Painting the area or purchasing supplies for your home office are two examples.
The percentage is applied to indirect expenses for your entire home. For instance, if your home business area is 15% of your total home space, you can deduct 15% of your utility costs. 3
Simplified Calculation Method
For smaller areas, the straightforward strategy is optimal. For a maximum of $1,500 each year, multiply the business square footage by $5 per square foot for up to 300 square feet. 4
This method has the advantage of not requiring you to keep track of all of your household spending and perform math to determine the percentage. When you adopt the simplified technique, you can’t deduct depreciation.
Limits on Home Business Space Deductions
Using either computation approach, the amount of deduction you can take for your home business space expenses is limited. If your gross income from business use of your home is less than your total business expenses, you may be able to deduct only a portion of your expenses. These restrictions apply to nondeductible expenses such as insurance, utilities, and home depreciation. These computations and restrictions are difficult to understand. 5
Reporting and Claiming Your Business Space Deduction
The calculating technique you pick will determine how you report your business space deduction.
Fill out Form 8829 to use the real expenses technique. With your business tax return, include this form.
Calculate the deduction using the simplified method on Schedule C, Line 30, or the applicable portion of your business tax return.
Frequently Asked Questions (FAQs)
Does claiming a home business tax deduction increase my risk of being audited?
It’s a common misconception that the IRS targets home companies. While this isn’t the case, owning a home business implies you should be ready if the IRS decides to inspect it. The IRS wants to make sure you’re not breaking the law by using your home office “regularly and exclusively” for business.
Did the 2017 tax law changes (the Tax Cuts and Jobs Act) affect home business tax deductions?
There were no specific changes to the tax law for home-based businesses, but there were some changes to businesses’ ability to take losses and increased depreciation deductions. You may also be eligible for the new Qualified Business Income deduction, which provides small business owners with an additional deduction on business income.
Can I claim more than one building at my home for this deduction?
If you utilize a separate free-standing facility, such as a studio, workshop, or garage, entirely and regularly for your business, you can deduct the costs. It doesn’t have to be your primary business location.