One of the most common questions we get asked from online marketers is how to claim a home office for your small business.
If you run a business where you work from home, you may be entitled to a home office deduction. Specifically for businesses filing on a Schedule C as a sole proprietor. If you file as an S Corporation or other business entity, you have to claim the home office differently, if at all.
Your office does not need to be an entire room in your home. But you must have a dedicated space that is strictly for use with your business. There are a couple of other requirements that you must meet at least one of in order to qualify.
You must meet one of the following in addition to what was mentioned above.
Your home must be an integral part of where you operate your business.
If you operate your business solely from your home, you are a-ok on this one.
If you have a business located outside of your home, you are going to need to substantiate that this is a legitimate second office for you. You will also need to prove that it is necessary to have this office in order to operate your business. For example, if you have an office you rent where it is just a mail drop location, but you actually perform the daily operations out of your home office, you can claim both.
You use the space to meet with customers or other staff members.
If you meet with customers at your home or hold staff meetings at your home you can put a check next to this one.
You use the space to store inventory or product samples.
If you keep product on hand to sell or use as samples and these are stored in your home office, then you qualify with this one.
Some words of caution:
The home office deduction can help reduce your taxable income and in turn your tax bill, however, the home office deduction cannot generate a loss on your Schedule C. If it does, the amount is carried forward to next year’s taxes.
If you own your home, claiming the home office deduction can result in taxable gains when you sell the home that you would not have otherwise had.
When looking at how to claim a home office this is something you will want to understand to know what the long-term outcome could be.
What is included as a deduction under a home office for your small business?
When you claim a home office deduction, you can claim rent or mortgage interest, property taxes, homeowners insurance, or renters insurance. HOA dues are often overlooked in this category, so if you pay those, make sure to tally them up.
You can also claim utilities and repairs for the entire house.
You get a percentage of these items based on the percentage of use of your home for business.
If you have items that are directly correlated to your office space only and not the whole house, you can take the entire deduction for that.
For example, if you convert your garage to a home office and need to install an AC or Heating unit to that space, you can claim all of that as it is strictly for your office, not the entire home.
Simplified home office deduction method
Rather than tracking all of those items for the year, you may want to entertain using the simplified method for calculating your home office deduction. This method allows you to take $5.00 per square foot of the qualified home office space up to a maximum of 300 square feet. This gives you a total deduction of $1500.00.
You must still qualify under the rules to claim a home office, but this can simplify the record-keeping process for you slightly. However, it may not always be the best option, so make sure to speak to your tax professional to see what is your best option.
When you use this optional method, you do not trigger the taxable gain possibility when you sell your home down the road.