With a properly established business, the door of itemized business deductions opens, and many deductions may seem like they are applicable to you. With most of us now working from home, Home Office Deductions offer a variety of different deductions that many are able to take that could potentially help you save thousands in taxes.
Part of your mortgage or rent, part of your power and water bill, your internet bill, cable, all can be tax-deductible expenses. Home Office Deductions can be extremely beneficial to help lower your total taxable income…. if you qualify for them. The IRS does not look lightly upon Home Office Deductions. They are one of the main causes of audit for many small business owners, so you need to make sure that if you are taking HODs, you are actually qualified to take them.
There are two qualifications that must be met if you are going to take these deductions.
- Exclusive and Regular Use – The first test is that you must use a portion of your home exclusively and regularly for your business. This means the room that you are deducting must be solely for business use. Having a desk in the corner of your living room would not satisfy this qualification. The office is generally in a separate room or group of rooms, but it can be a section of a room if the division is clear. i.e. a partition, or a cubicle so you can show that personal activities are excluded from the business section. If you satisfy this test, you are on your way to taking these deductions.
- Principle place of business – After passing the exclusive and regular use test, your home office must be either the principal location of that business or a place where you regularly meet with customers or clients. If you are an employee of another company but also have your own part-time business based in your home, you can pass this test even if you spend much more time at the office where you work as an employee. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business. You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers.
If you do qualify for Home Office Deductions, definitely take them. Save yourself and your business money. For those who are still a little unsure if they can take them, tread lightly knowing that the IRS is on the lookout for those who will take advantage and do not fully qualify.
Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.
If you are unsure if your business is set up correctly in order to take itemized business deductions, or if you are unsure if you should take Home Office Deductions, we are happy to help out.