More people than ever are setting up offices in their homes, thanks to changes in work habits and the rise of side-hustles. With this increase, many are curious about the potential tax savings they could enjoy due to the wear and tear on their home spaces used for work. Let's dive into the essentials of the home office deduction and how you can take advantage of it without running into trouble with the IRS.
If you're a W-2 employee and work from home but don’t have an extra side-hustle or small business, unfortunately you're out of luck. There's no deduction available for unreimbursed employee expenses under current U.S. tax law. But, if you're self-employed or have a side-gig that earns you extra income, there's good news! You likely qualify for the home office deduction, which can help you save on taxes.
To claim this deduction, your home office must meet two key requirements:
1. Regular and Exclusive Use: Your home office must be used regularly for your business and not for other activities. There are some exceptions, like minimal personal use, but the space should primarily serve your business needs.
2. Principal Place of Your Business: This part is easier to meet. It means that your home office must be the main place where you manage your business, even if you conduct business elsewhere too (more on the Administrative Office option later).
1. Simplified Option: This method allows you to multiply a prescribed rate ($5 at the time of this post) by the square footage of your office (up to 300 square feet), simplifying the calculation and record-keeping process.
2. Regular Method: More suitable if you have a larger or more expensive home office. It involves calculating the deduction based on the percentage of your home used for business and applying it to home-related expenses like mortgage interest and utilities.
Claiming the home office deduction opens the door to other tax benefits. For instance, it can enhance the amount you deduct for vehicle use if you travel for business starting from your home office. Moreover, if using the Regular Method described above, it allows you to deduct a portion of other home expenses like insurance, repairs, property taxes, etc.
However, as with all tax deductions, it's important to keep good records and not exaggerate your expenses. Overstating your use or claiming ineligible expenses can lead to trouble if you're audited.
If you run your business as an S-Corporation, keep in mind that S-Corporations aren’t people with homes, so a home office deduction wouldn’t normally be allowed. In this case, consider setting up an accountable plan so the S-Corp can reimburse you for your home office expenses. This can be a tax-efficient way to cover your costs.
Sometimes, your primary business activities might take place outside your home, like meeting clients or providing services at a primary office location. However, you can still qualify for the home office deduction through what's known as the Administrative Office option. This scenario acknowledges that many small business owners and freelancers conduct significant administrative tasks (such as bookkeeping, emailing, billing, etc.) from a home office, even if it's not their primary place of meeting clients or performing services.
Don't miss out on the home office deduction out of fear of being audited, especially if you clearly meet the qualifications. Instead, focus on maintaining proper documentation and following the rules. This deduction isn't just about saving money, it's also about acknowledging the real costs of running your business from home. Here at Redemption Tax and Accounting, we work proactively with our clients planning ways to reduce your future tax liabilities, including how to best leverage the home office deduction. Reach out to us or book a free discovery call on our Contact page.
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