Many small business owners – particularly those who have begun companies in their houses – seek to take advantage of the Home Office Deduction.
If you use part of your home for company, you may be able to deduct business expenses for it. This deduction applies to both homeowners and renters.
Unfortunately, the deduction calculation has complex allocation and substantiation requirements. The most common method is to determine the actual expenses of their home office. These include mortgage interest or rent payments, insurance, utilities, repairs, and depreciation. The home deduction is based on the percentage of your home devoted to business operations. For instance, if you use one room for your business (a home office, for example), you must figure out the percentage of your home that the room represents.
To qualify as a deduction, the room must be regularly used exclusively for business. You cannot stick a desk in your large master bedroom and then expect to write off the largest room in your house! Nor can you deduct your kitchen if you occasionally do catering jobs. Additionally, if you conduct business at a place other than your home – at an office, for instance – you may still deduct some of your home. This is relevant for professionals, such as psychologists, attorneys, CPAs, and medical professionals who might use offices in their homes to meet with clients.
Know that claiming Home Office Deductions can be a flag for the IRS. If you overestimate the amount of your home that you try to claim against your business taxes, you might actually be increasing your chances of being audited. Determine whether the Home Office Deduction is worth that risk.