With the growth and ease-of-use of technology these days, many small business owners don’t have the need to go out and rent office space to operate their business. If you operate your business (not a hobby or some other personal pursuit) from your home or if you do work at home for your employer, you can realize significant tax savings via a home office deduction on your income tax return. However, in order to qualify for this deduction, you must meet certain IRS requirements.
First, you must use the specific area within your home for business exclusively and on a regular basis. You may work and meet clients in other locations, but if you use the room for anything other than work, such as a laundry room or a den, you would negate the exclusivity requirement. And while there is no specific definition of regular use, you must use the same area on a consistent basis. The area can be a room, a separately identifiable space or a free-standing structure, such as a garage. This deduction is available to both home owners and renters alike.
Second, you must show that your home is the principal place of your business. You may still work in multiple locations, but you must spend more than half of your time and perform the key revenue-generating activities at your home. If you are an employee who works from home, you may realize the home office deduction as long as the use of your home is for your employer’s convenience and as a condition of employment and:
- necessary for your employer’s business to function; or
- necessary for you as the employee to properly perform the work.
There are two methods for calculating a home office deduction amount. The simplified method entails deducting $5 for every square foot of your home office. This method applies only where the home office is 300 square feet or less. The traditional method, which requires calculation, allocation and substantiation of actual expenses, looks at both direct and indirect expenses.
Direct expenses pertain to expenses just for your home office, such as furniture, equipment, etc., and may be fully deducted. Indirect expenses benefit the entire home: utilities, insurance and so on, and are deducted at the percentage that applies to the home office.