Tax Strategies for Business Owners

If you run your business from part of your home, you may be able to deduct some of your household costs. The home office deduction is legitimate, but it comes with requirements, and it deserves careful documentation.

Who Can Claim It

The general test is that you use a portion of your home regularly and exclusively for business, and that space is either your principal place of business or a place where you meet clients or customers in the normal course of business. Some other situations also qualify, such as a separate structure used for business, or space used to store inventory under certain conditions.

• Regular use means on a continuing basis, not occasionally.
• Exclusive use means that space is not also used for personal purposes. A desk in a corner of the family room usually will not qualify, but a clearly defined area used only for work can.
• Principal place of business can include a home office used for administrative or management work if you have no other fixed location where you do substantial administrative work.

Employees generally cannot claim this deduction under current law, even if they work from home. It is mainly for the self-employed and business owners.

Two Ways to Figure It

The Regular Method

You determine the percentage of your home used for business, often by comparing square footage, and apply it to eligible expenses such as mortgage interest or rent, real estate taxes, utilities, insurance, repairs and depreciation. This can produce a larger deduction but requires more records.

The Simplified Method

The IRS allows a standard rate per square foot of qualifying space, up to a maximum area. You skip tracking actual expenses, though you still have to meet the use tests. The rate and square footage cap are set by the IRS, so check current figures at irs.gov.

Limits

The deduction generally cannot exceed the income from the business use of the home, with some excess amounts carried forward under the regular method. Check how your business structure affects where and how the deduction is claimed.

Selling Your Home Later

Under the regular method, depreciation claimed on the office space can affect the tax when you sell the home, including the portion of gain that is attributable to that depreciation. This is worth considering when you make your choice.

Keep Records

• Measurements or a floor plan of the office space.
• Photos showing how the space is used.
• Bills and receipts for housing costs.
• Records of the business use, such as meetings and work performed there.

Common Mistakes

• Claiming space that is also used personally.
• Deducting expenses twice.
• Ignoring income limits.
• Not keeping evidence.

Not sure if you qualify? Ask our office and we will review your situation. You can also see our business tax preparation services.