More than half of all businesses in the United States are now home-based.
And if you own a home-based small business or thinking about starting one, we can see why. You get to skip the puzzle of getting to work on time.
And best of all, you get to save on taxes.
That’s right, if you’ve carved out a portion of your home for business use, you can claim more than a handful of tax advantages and deductions.
Consult with your accountant to determine what deductions apply to you specifically but we’ll be deep-diving into the most common mouth-watering, money-saving deductions today.
Let’s dive in.
How to Claim Home-Based Business Tax Deductions
To be able to claim any home-based business tax deductions, you must:
- be a registered business owner or independent contractor and
- pass the “exclusive use” test
In simple terms, you have to be able to show that the space in your home is dedicated and regularly used to conduct business.
So while your living room or bedroom may be a comfy place to work, it would not qualify.
Note that there are exclusions to the exclusive use test for businesses that either hold inventory and samples or use their home as a daycare.
Home-Based Business Tax Advantages & Deductions
Let’s talk about common deductions you can claim for your home-based business if you meet the IRS guidelines.
- Utilities such as electricity, gas internet, and your phone bill
- Homeowners Association fees
- Mortgage insurance and interest
- Homeowner’s insurance and
- Cleaning supplies and services used in your business space
You read that right. Expenses that everyone with a home pays regardless, you get to deduct, solely because you have a home-based business. Not bad.
You can also write off expenses dedicated to any repairs or upgrades you make to your home.
When it comes to repairs, the amount you can deduct differs if the repair or upgrade was direct or indirect.
A direct repair or upgrade is one that is only confined to your office space. An example would be adding an outlet to your home office.
An indirect repair or upgrade is one that benefits your entire house such as a new HVAC system.
Not bad, especially if you need to make repairs anyway, regardless of your office.
How Do You Calculate The Deduction?
There IRS gives you two ways to do so: A simplified option and a regular option:
A. The simplified option is to take the Standard deduction of $5 per square foot of home used for business (maximum 300 square feet).
You can still claim allowable home-related deductions such as mortgage interest, and you are not allowed to claim depreciation for the years you used the simple method.
The simplified method can make it easier for you to claim the deduction but might not provide you with the biggest deduction.
B. The regular option is to deduct based on the percentage of your home that you actually use for business.
To get an accurate percentage, you’ll want to divide the square footage of your dedicated office space by the total square footage of your home.
Check out this comparison chart provided by the IRS for a better look at the two methods.
General Home-Based Business Tax Deductions
Outside of specific expenses we talked about thus far, home-based businesses are also able to deduct other businesses’ expenses that are non-home related.
Here are 6 common deductions for businesses in general:
1. Meals and entertainment: Typically, can deduct 50% of any business-related meal and entertainment expenses.
3. Supplies: The cost of supplies needed to run your business.
4. Marketing costs: Expenses to market your business such as website domain and hosting fees and advertising expenses.
5. Use of your car for business: Percentage of your car used for business is allowed to be deducted.
6. Cost of goods: Material costs, labor costs, and more that are needed to create your products or services are deductible.
If you currently own a home-based business or thinking about starting one, we know you loved this post. We definitely enjoyed making it.
Moreover, to help you get the most of your small business’s revenue, be sure to keep your books and finances healthy by working with a reliable accounting firm like us.
Get in touch with LYFE Accounting today!