What to Know About Home Office Deductions

Home office with wood furniture and big windows
Part of running a business is knowing the tax deductions you can take. If you have a home office or run your business out of your home, what tax write-offs should you be keeping receipts/records of for your accounting?

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Questions About the Home Office Tax Deduction

Everyone wants to know about tax deductions and what can or cannot be included when it comes to a home office. The tax laws are constantly changing, and it is important to weigh the options to make sure you are able to deduct your home office. It’s worth the conversation with your tax preparer since they need to keep up each year with the tax laws to do their job the best they can. As a business owner, your focus is on what you can do to run your business the best you can.

Can I claim my home office as a deduction?

Yes, but there are some conditions which need to be met, and these come with some exceptions. In general, you must be able to prove regular and exclusive use of the space you are using for your business out of your home, and it must be the principal place of business. The exceptions to these include using part of your home for inventory or storage for your company, even though your business’s primary location is in a different location. Though your home does not have to be the only place you conduct business, you must use this space exclusively and regularly for administrative activities, including billing, recordkeeping, and management activities. If you follow the tax rules for this, you will be fine.

What expenses can I deduct for my home office?

There are two methods for this calculation. The simplified method, which began in tax year 2013, allows for simplification of the calculation using a standard $5 per square foot to be used in determining the home business deduction, and this space may not exceed 300 square feet. In the regular method, you must keep records of expenses related to your home and home office. This includes mortgage interest, taxes, maintenance and repairs, insurance, as well as utilities including water, electricity, gas, trash, and internet/phone service. If your home office is 200 square feet and your home is 2,000 square feet, you will be able to deduct 10% of these expenses as a part of your home office. If there are purchases for your home office used entirely for your business, then this expense can be deducted in full for your business. An example of this may be a computer. If the business and home share one computer then the computer may not be able to be deductible from your home-based business, though a portion of it may be deductible. These are potential deductions you should review with your tax preparer.

Which is better, the Simplified Method or the Regular Method of Calculating the Home Office?

The only way to know this is to have your taxes/deductions calculated both ways, at least for the first year. This will show you which method is more advantageous for you and your taxes. Since both methods are acceptable, you should really consider trying both. Your tax preparer may be able to eyeball it based on your initial information to see if a more detailed review is needed. If it is close, and it changes from year to year, you can switch back and forth from year to year, but you can not use both in the same year. There are also some understandings which need to be had regarding depreciation from each method. Make sure to review this with your tax preparer as well.

What records do I need to keep?

Any bills that are being used as a deduction on a home office need to be documented and saved just like bills for your business. For example, if you plan to use the regular method, you will want to keep detailed records of all business expenses you plan on deducting, either on paper or electronically, and be prepared to show these as actually paid. Though this may be a bit time consuming, a bit of organization and planning will help make this easier at tax time both for you and your preparer. Documentation and recordkeeping is part of the tax process, so don’t let the extra bit of paperwork and documentation prevent you from claiming all eligible expenses which are deductible for your home-based business.

If I am running a home-based business, what other deductions can I take?

A home office and a home-based business are different. A home office typically means there is another location where some or all the business is operated. A home-based business is run 100% out of the home. For home-based business owners, there are other expenses as a business owner you can and should deduct. These expenses may include payroll costs, health insurance, bank fees, education, business use of your car, taxes and licensing. You should record every expense you use for your business and, when possible, use a separate banking account for personal expenses and business expenses to help keep these separate. Your tax preparer will review these every year and if there is an expense which cannot be claimed on the business, they should let you know. You should have a conversation with your tax preparer to understand all of the expenses you should claim on the business, so it’s best if you keep accurate records of these.

How Do I Find the Right Tax Preparer?

There are many people who can help you with doing your taxes. Tax professionals will have training and charge a fee for their services. There are people do their own tax preparation or have a friend or family member help them. When it comes to businesses knowing the tax laws is a bit more complicated, and utilizing the experience and knowledge of someone trained for this is a solid recommendation. These laws change and business owners don’t always have time to keep up on them.

When looking for the right tax preparer you’ll want to know the following:

  • How long they have been doing tax preparation?
  • What education background do they have?
  • How do they keep up on the current laws?
  • Are they easy to get in touch with via phone, email, or text?
  • Do they have others working with them as a part of a team?
  • Do they give advice on how best to plan out expenditures, so you know about the tax ramifications of these, or do they only do the preparation?
  • If you have a disagreement in the interpretation on a tax law, will they follow your direction or will they push back? Maybe more important, if they push back, but you still believe it is a valid deduction, will they follow your direction?

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