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The Home Office Deduction: A Guide for Small Business Owners
  • 29 November 2017
  • Eric Michaels

The Home Office Deduction: A Guide for Small Business Owners

Do you currently run your company from a home office? If so, you may be eligible for the home office deduction. This deduction applies to all types of homes, and is available for both renters and homeowners. As you prepare your next tax return, keep the following considerations in mind so that you are well-equipped to take advantage of this tax break.


1. The basic requirements

Before you take action, make sure you have a solid understanding of how to determine your eligibility for this deduction.

Ask yourself the following two questions about your work space:

  • Do I use the designated area in my home exclusively for business?
  • Does my work take me into that space on a regular basis?

If you answered "yes" to both questions, you should be able to claim use of a home office to reduce your tax obligation. On the other hand, if you work in a space that you use for both business and leisure activities, you cannot claim it as a home office. For example, this would be the case if you conduct your business operations at a desk in your bedroom.

2. Measuring your work space

Since 2013, taxpayers have been allowed to use the "simplified option" for determining their deduction for the business use of their home. According to the IRS, this option offers a "standard deduction of $5 per square foot of home used for business (maximum 300 square feet)."

If, instead, you choose to use the older, regular method, you’ll need to calculate the percentage of your home used for business. Once you crunch the numbers and your books are in order, you can use that percentage to calculate the types of repair costs, improvements, utility bills, and other expenses you may be eligible to claim for your business.

3. Office improvements

If you are purchasing new equipment or renovating a section of your home for the purpose of your business, you may be able to claim these office improvements as a tax deduction. Just make sure you aren’t utilizing this room and equipment after hours. IRS auditors treat the separation of work and play very strictly, and you could end up paying back taxes if an agent determines you flouted the rules.

4. Limits for home office deductions

It’s important to remember that there are limitations on the amount you can deduct based on the amount you earn. Keep this point in mind as you move forward with a start-up business. Even though you can deduct a larger sum for first-year business expenses, you don’t want to be caught off guard with an unpleasant surprise at the end of the year. Aim to run your business as if there is no built-in protection, in order to protect your finances overall. The IRS treats real estate and investment losses quite differently, so it’s a good practice to stick to your deduction limit for the year.

5. The audit rumor

For years, the idea of claiming a home office deduction terrified entrepreneurs. As U.S. News reports, many business owners were concerned that taking this action may automatically flag an IRS audit. As with all tax filing matters, the key to protecting yourself is to study all associated requirements and follow the rules to the letter. If you do so, you have nothing to worry about. Don’t leave money on the table: If you keep clear records and your accountant gives you the green light, go ahead and file for the deduction.

By developing a solid understanding of home office deduction requirements, you can position yourself to save a significant amount of money each year. For more information, refer to IRS Publication 587.

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