The Home Business Tax Deduction

Joseph A. Lux, C.P.A., PLLC

December 1, 2018

Entrepreneurs and seasoned business owners have discovered that setting up shop in their home can be a cost-efficient, flexible way run an existing business or get a new one off the ground. A growing number of businesses are staying put in the owner’s home rather than moving into a separate location. Even the many professional, reputable, and aggressively growth-minded companies are joining the ranks of home-based businesses.

Several years ago the IRS loosened its position on home office tax deductions. Up until that time it was believed among tax professionals that it would be best to avoid home office tax deductions so not to raise a red flag on a tax return and likely invite IRS scrutiny. This is no longer the case. The IRS changed its position and has given a green light to qualifying home offices. Lets take a look.

If your office is located in your home, you may be able to claim a portion of your home expenses such as rent, depreciation, property taxes, utilities, mortgage interest, repairs & maintenance, and insurance as a special deduction when reporting your income taxes. Portions of all of these costs are associated with your business and therefore may be tax deductible. Your business may occupy space in your home for operations, to maintain an administrative office, store inventory, supplies, or records, or to park and maintain vehicles or other equipment. The IRS’s general rule is that if your business qualifies (discussed below), you can deduct a pro rata share of home business expenses. “Pro rata” simply means a share that’s proportional to the percentage of home space that you use for your business.

There are four basic requirements must be met for your home to qualify for a tax deduction:

1. Exclusive Use. You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room. However, mixed use areas generally do not qualify for a deduction.

2. Regular Use. A specific area of the home must be used for business on a regular basis. Incidental or occasional business use is not regular use.

3. Business Use. The qualifying area must be used for business, not just to “hopefully “make some money.

4. Principal Place of Business. You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may still qualify for a home office deduction. For example, the space in your home will qualify if it is used for administrative activities and there is no other fixed location where substantial administrative activities are conducted.

Homeowners with home businesses face a couple of tax issues if they end up selling their home. However, these rules are relatively easy to understand and generally quite favorable to home business owners. Do not make the mistake of forgoing home office tax deductions due to your fear of tax implications.

Ask your CPA whether you qualify for a home office tax deduction. He can help you to maximize this deduction and keep more money in your pocket after taxes. For a full explanation of tax deductions for your home office refer to IRS Publication 587, Business Use of Your Home.

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