Does your office space qualify for a home office deduction?
Working from home has become a practice of choice for entrepreneurs and small business owners across all fields. Thanks in large part to advances in technology, more self-employed professionals are discovering the great perks of using a home office to conduct their trade instead of finding outside office space or a brick-and-mortar location. In addition to this work-from-home convenience, the home office deduction is a fantastic way to reduce your IRS tax bill as a business owner. So do you qualify for this write-off? Let’s explore it.
Entrepreneurs who use a home office often have the ability to deduct expenses incurred when working from home. IRS rules state that a home office must be utilized for business-related activities. Yes, the word “home” is included in this term, but those working out of a studio apartment or a mobile home are eligible for it. In other words, the office doesn’t have to be set up in a 3-story, $2-million mansion to claim this deduction. Therefore, both homeowners and renters can take advantage of it.
In general, the specific dollar amount you can deduct using the home office deduction depends on the percentage of a residence that you use for work purposes. Keep in mind that if the gross income generated by your business happens to fall below your total business expenses, the amount you can write off will be limited. Deductible home office expenses you can claim include rent, insurance, electricity, mortgage interest, depreciation, home repairs, and an Internet connection.
There are multiple factors involved when determining how to deduct an entire room or part of a room as your home office. Remember that this office space should be considered your primary place of conducting your trade or a space you use to meet face-to-face with clients or patients in medical-related businesses. You can also designate a separate building or structure on your property as your home office. Daycare operators who use their homes for their businesses can claim home office expenses as well, even if the daycare space is utilized for other purposes during off hours.
In 2013, the IRS developed a simpler home office deduction option to go along with the traditional percentage method. Through this alternative write-off method, small business owners are able to claim a flat-rate deduction worth $5 per square foot for up to 300 square feet of home office space. However, there is a deductible amount limit of $1,500.
The regular deduction method typically requires considerable expense documentation and recordkeeping. This is why the IRS added the flat-rate option. On the other hand, using the flat-rate option is not always as helpful to entrepreneurs who reside in areas where the cost of living is above-average. This is why exploring both routes is important to determine the best option for your particular situation.
Financially-strapped business owners and aspiring entrepreneurs should always be on the lookout for ways to reduce their tax bills from Uncle Sam. Whether you claim the home office deduction, the vehicle deduction, or the meals and entertainment deduction, there should be options out there for you to help you keep more of your hard-earned income. It all boils down to finding these deductions, saving your receipts, and then properly claiming them on your tax return.