More and more small business owners work out of their homes. Home offices create an opportunity to save a tremendous amount of expenses on overhead annually. Not everyone needs to work from a separate office to see clients and to operate their business; technological advances have made video conferencing as easy as in-person meetings! Self-employed professionals spend less time on the road commuting and simplify the intersection of personal and professional life.

Fortunately, the IRS has laid out a tax provision under Schedule “C” deductions for home office users to track the amount of square footage they use inside their homes to conduct their businesses. Home office and inventory space are both allowable deductions. Here’s what you need to know about the requirements to qualify space within your home for a home office tax deduction.

The exclusive use requirement for the home office tax deduction

It seems straightforward, but your home office space must be clearly identifiable. It doesn’t necessarily have to be in a separate room unto itself, but it does need to demonstrate all the provisions that go with conducting business. In case of an audit, a desk, printer, computer, whiteboard, and other office equipment must have a permanent location in your home. Take as much room as you need. Increase the office area as your business grows. You can also include closet space used to store items you need for business. If you use your garage for inventory, include this as well. You cannot use structures that aren’t part of your home, such as storage sheds or outdoor patio areas.

Square footage and expensing

The standard deduction is determined by the total square footage you use. However, there is a limitation based on tiers of space: 100 square feet, 200 square feet, and 300 square feet are maximums. The current deduction rate is $5 per square foot. If you use 300 square feet of space, then your home office deduction is $1500.

Expensing a portion of your rent or mortgage, insurance, and other household bills is based on a simple percentage formula. Let’s say you use 300 square feet of space for business activities. If your home is 1200 square feet, then you can itemize each household expense at 25% for business purposes.

How offsite work applies to home office tax deduction

Some busy professionals spend most of their time away from their home office. They conduct sales calls out of their cars or at office shops and meet with clients onsite. This is may seem like a gray area, but here are some general guidelines on business activities to help you to stay within regulatory compliance. Your office can be anywhere; your home address must be your principal place of business. You may only use it to send out mailers, track receipts, and file quarterly taxes.

Carry forward expenses

Home office tax deductions still apply during periods of net income loss. You can carry forward your home office tax deductions to more profitable years in the future. However, Schedule “C” deductions cannot exceed the net profit your business earns in a given year. Again, record and carry forward the itemized deductions into a tax period where you can use them.

State tax and business planning

Check your state’s rules about home office tax deductions. Every state has slight variations on what their requirements are. Seek the advice of a tax professional to make sure that you meet the requirements. Find out what the deduction is per square foot for your state and how household expenses can be applied. You may need to record a separate set of calculations for your state taxes. 

State and Local Tax experts (SALT) can help you to plan properly for the growth of your home-based business. If you expect to continue to grow your business with a home office model, I would recommend consulting a professional to help you to plan for it. This will help you ensure that you are identifying all your potential deductions while you also minimize audit risk. It’s the best of both worlds, and SD Mayer has decades of experience in tax management serving the Bay Area small business community.

Working from home has so many benefits. Don’t forget to utilize your home office deduction. The tax professionals at SD Mayer can help walk you through everything you need to know about accurately claiming this deduction, and any other particularities involved in telecommuting. Contact us today to get started.

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