Top Tax Deductions for Your Home Business (that you probably haven't heard of)
There are a number of advantages of running a business from your home. You could, for instance, tap the day away on your laptop from the comfort of your own bed. Or you could kill two birds with one stone and take your dog out for a walk while you mull over the details of your next sales pitch. More importantly, you may be eligible to deduct from your taxes some of the expenses for the business use of your house. This is true whether your own or rent your home.
It's imperative, however, that you understand the guidelines for home office deductions. Otherwise, you could end up missing out on a number of deductions that could help you save money at tax times or, even worse, you could accidentally take ones that you shouldn't and trigger an audit.
So what can you deduct? The following are just a few of the items that you may be eligible to write off of your next tax return.
First, What Qualifies as a Home Office?
According to the IRS, if you want to deduct an area of your home as your office, it must be a space that is used exclusively as your place of business. So let's say you actually do a lot of work in your bed on your laptop -- neither your room nor your entire bedroom would qualify as an office as they aren't used exclusively for your business. If, however, you conduct your business from a desk in your bedroom, you could deduct the portion of your bedroom in which your desk lies.
Another example? If you turn a spare bedroom in your home into your office, you can then deduct that entire room, as long as you don't use any part of that space for personal reasons. But if you decide, for example, to move a bed in that room for house guests or workout equipment, then you will no longer be able to deduct for the space in which that equipment or bed is situated.
Your office space must also be your principal place of business. That does not mean you can't work elsewhere or that you have to work in your office every day. However, it should be the place where you conduct your major "office" type of duties, such as invoicing or your product ordering. It can also be the place where you meet with clients or customers during the course of your business.
Simplified Option or Regular Method
Once you've determined the square footage of your office space, you can either use the simplified option or the regular method to determine your home deduction. With the simplified option, you multiply the square footage of your home office by a rate of $5.
With the regular method, you can deduct a portion of your home costs, such as mortgage, property taxes, insurance, interest and utilities or, if you are a renter, a portion of your rent. You can also deduct the depreciation of your home that corresponds to the size of your office space. If you decide to use the regular method, you will need to keep careful records of all of your costs so that you can substantiate these expenses. You may also want to take several pictures of your office space. That way if you're ever audited a few years down the line and you've changed the office space or have moved, you can prove that you were in compliance with the rules at the time of the original filing.
Other Office Expenses
Did you know that new items, including desks, chairs and even art, that you purchase for your office may also be tax deductible? Repairs and home improvement projects that are made to your space are also tax deductible.
New Home Office Rules for Those Who are not Self-Employed
In the past, a person who was not self-employed, but was an employee of a company who allowed them to work out of a home office and also met certain criteria could deduct some of their expenses. However, that has changed with the Tax Cuts and Jobs Act (TCJA), which began in tax year 2018 and continues through 2025. Under the TCJA, these types of employees will no longer be able to claim itemized deductions for a home office. Learn more about how the Tax Cuts and Jobs Act may increase your tax liability from our blog.
How a CPA Can Help a Small Home Business
Home business tax deductions can be very complicated and may even have later ramifications. For example, if you write off part of the depreciation on your house for an office, you need to be aware that there may be some tax liabilities later on if you sell your home. There are also specific rules for certain businesses, such as for home daycares. And that is why many businesses prefer to leave their tax matters in the hands of a professional CPA, who understands the many different rules and restrictions. As for the cost of a CPA, the IRS actually allows you to deduct it as a business expense on your taxes.