Ah, the perks of working from home. You give up winter commutes, dress codes, and office drama. At the top of your “why I love working from home” list is being able to take a home office tax deduction and other home business deductions when you file your income tax return.
This post provides a list of what’s required to qualify for a home office tax deduction, other deductions you can claim, and the benefits of having a home business. So without further delay, let’s delve into these questions.
What Are the Requirements to Get a Home Office Tax Deduction?
As you don cozy clothes and enjoy your flexible work schedule, take note of these prerequisites for getting a home office tax deduction.
- Before we go over the requirements, here’s other information you should know. The deduction is available to homeowners and renters regardless of the type of home you live in. Home examples include single-family dwellings, apartments, condos, or even houseboats. Other spaces also qualify as long as you work there regularly to conduct business activities. Please note: you can’t use the same space to carry out separate functions. For example, if you work in the same room where you sleep, this space doesn’t qualify for a home office tax deduction.
- You can choose the regular method (actual expenses) or the simplified option (rate calculation) to determine the amount of the home office tax deduction. Use Form 8829 to know which expenses are eligible. When tracking actual expenses, make sure to keep detailed records to support the deduction. Likewise, homeowners who take a home office tax deduction must depreciate the value of their home when using actual expenses but aren’t required to do so when using the simplified option. If you have questions about depreciating your home, you should consult a tax professional.
- You must meet two basic requirements to take the deduction. Your home office must be the principal place of your business and it is used regularly and exclusively for business purposes. Having a home office doesn’t limit a business owner as to where they carry on business activities. Many business owners operate their businesses at more than one location. However, to take the home office tax deduction, that space must be the primary location.
What Other Deductions Can You Claim as a Home Business?
In addition to taking common tax deductions for businesses, make sure you take every home business deduction that’s available, like these home-related expenses.
- Homeowner’s and Mortgage Insurances: Business owners who use their home as the primary place of business can deduct a percentage of these types of insurance costs.
- HOA fees: You may be able to use a portion of what you pay toward condo or neighborhood homeowner’s association fees as a legitimate home office expense.
- Mortgage Interest: Again, you won’t be able to deduct the full amount of mortgage interest you pay but you can use a percentage based on the square footage of your home used for business purposes.
- Repairs and Maintenance: If you add shelves, additional electrical outlets or paint the walls, these are considered direct expenses that benefit your home office exclusively. If you repair a leaky roof, that’s considered an indirect expense. You can deduct an equivalent amount based on the size of your home space compared to the total living area. As another example, you wouldn’t be able to deduct amounts paid for landscaping or lawn care. An exception would be a lawn care business that for business purposes uses its lawn to advertise for more clients.
- Cleaning services and supplies: Specific amounts you pay to keep your business space cleaned can add up quickly and are deductible.
- Utilities: Keep track of your electricity, internet, heat, and phone costs to deduct a portion of these expenses.
- To claim other home business deductions consider getting a separate landline for your business. Since you only use that line exclusively, you can deduct the full cost. Invest in project management software and a mix of traditional IT products and cloud solutions to not only work more efficiently but deduct the costs to save on taxes.
Benefits of Having a Home Business
When you start a home business, it doesn’t take long to recognize the numerous personal and business benefits of working from home. Cat purrs and your dog’s wagging tail never get old and the refrigerator never seems to run out of your favorite comfort food.
In addition to creature comforts and tax advantages, running a home business has other tangible bonuses. You’re the boss in charge. You decide what income opportunities to pursue and how much risk you want to take to achieve your business goals.
If you have personal obligations like driving your kids to school or helping an aging parent, you have the freedom and flexibility to attend to your family’s needs.
By having a home office space, you don’t pay typical overhead costs other business owners incur when renting space or buying commercial property. In other words, you can operate a home business without investing a significant amount of money.
This anonymous quote sums up one of the main benefits of owning a home business.
“Entrepreneurship is living a few years of your life like most people won’t, so that you can spend the rest of your life like most people can’t.”
At Camino Financial, we hold the same view. We support entrepreneurs of any size and we provide you with the tools and financing to escalate your business. We keep moving forward with you because we’re passionate about helping you succeed.
If you are ready to file your taxes, check out this Guide to File Taxes as a Sole Proprietor.