Small business owners working from home can significantly reduce their tax burden through the home office deduction, but many miss out due to confusion about eligibility requirements and claiming methods. This comprehensive guide explains which expenses qualify for the home office deduction, how to properly calculate and claim these deductions on your tax return, and critical pitfalls to avoid that could trigger an IRS audit. Whether you’re self-employed or run a small business from a dedicated workspace in your home, understanding the difference between the regular method and simplified method for claiming home office expenses can help you maximize legitimate deductions while maintaining full compliance with IRS regulations. Learn the essential requirements including exclusive and regular business use along with proper documentation practices to support your claims.
Which expenses can you claim?
For a small business owner with a home office you may be able to deduct some of the following expenses when filing your return:
Deductible mortgage interest Real estate taxes Insurance Rent Repairs and maintenance Utilities Other expenses related to the business use of your home
You will be able to claim your monthly expenses as indirect expenses or direct expenses when claiming home office deductions. If they are indirect, you will be able to take a deduction equal to the expense amount multiplied by the portion of your home used exclusively for a home office. If they are direct expenses, they will be taken at the full value as you are stating these expenses are being used only for business purposes.
Where to claim?
Small business, self-employed taxpayers who file Form 1040 and claim a home office for their small business will claim this deduction on Form 1040, Schedule C. You will go through the calculation of your home office allowance on Form 8829, Expenses for Business Use of Your Home. This form will be included as an attachment to Form 1040 when filing your return. You will place on the form your total square footage of your home as well as the total amount of your home office. These two amounts will be divided to find the portion of your home used for business purposes. The business purposes percentage will then be used to determine how much of your indirect expenses are deductible by the business.
Once you have properly calculated your home office deductions on Form 8829, you will be able to claim your deduction on Schedule C of your return. Line 35 of Form 8829 will be carried through and reported on line 30 of Schedule C.
Common pitfalls of individuals attempting to claim a home office deduction
Home office deductions are not allowed to anyone and everyone who has an extra room in their home they are conducting some business out of. Some of the common errors in claiming a home office deduction for your business include the following:
Claiming your entire expense instead of allocating for the portion you can claim. Employee of a firm who works from home claiming a home office, but also has an office location provided by the employer. Using the office for both personal and business use. The IRS requires a home office to be regularly and exclusively used for business purposes in order to be claimed. Not keeping proper books and records. The key to any expense deduction is to have the proof and documentation to support your deduction. Claiming an excessive home office to have a larger deduction by writing off personal expenses.
You do not want to fall into any of these pitfalls as they all could result in you being flagged for an audit or having to pay back a large amount of tax debt if the IRS audits you and you do not have the proper support.
Methods to claim a home office expense deduction
You can claim a home office deduction by using one of two methods. You can either uses the regular method or you can use the simplified method. The regular method was the method with has been described previously in this blog. You will take all of your direct expenses at their full amount paid. You will then take your indirect expenses and claim them at the percentage of your home being used as a qualifying home office.
If you do not have all of the necessary records required to add up all of your direct and indirect expenses to determine your home office deduction you can still claim a deduction for your qualifying home office. You are able to use the simplified method in this circumstance which requires much less paperwork and recordkeeping on your behalf. You will still be required to verify that you have a home office that was used exclusively for business purposes.
When claiming a home office deduction using the simplified method you will simply determine the square footage of your office being used. For example, a self-employed individual using a spare room in their home of 12 feet * 10 feet to keep their business records and prepare the billing account information would be allowed to claim a home office of 120 square feet. The Simplified method allows a home office deduction of $5 per square foot being used. This example would result in a total home office deduction of $600. The maximum deduction allowed under the simplified method is 300 square feet or a $1,500 deduction. You can use the simplified method, even if it results in a larger tax deduction than the traditional method. You are also able to claim all of your property taxes if you itemize deductions on Schedule A.
One thing to keep in mind when claiming any small business tax deductions is that the burden is on the taxpayer to provide support for the deduction in the case of an audit. Due to the potential for abuse of this deduction and the increased risk for audit, you want to make sure that you are properly claiming your home office deduction. If you have questions regarding a home office deduction or if you need tax help for your small business, contact our office to speak with one of our tax relief specialists.
For small business owners who find themselves facing unexpected tax liabilities, understanding your options is crucial. Whether you need assistance with tax preparation, are dealing with IRS installment agreements, or require help with tax compliance services, working with qualified professionals can make all the difference. Learn more about professional tax credentials and how to choose the right tax attorney in Michigan to handle your needs. For additional resources on small business tax planning, visit SCORE or review IRS guidelines for self-employed individuals. The National Association of Enrolled Agents provides directories of qualified professionals, while the Journal of Accountancy offers ongoing updates on tax law changes. If you’re experiencing financial difficulties and need to explore options like an Offer in Compromise or dealing with IRS tax levies, professional guidance can help protect your rights as outlined by Cornell Law School.
Disclaimer: Austin & Larson Tax Resolution has prepared this website for informational purposes only. This website is not intended to provide, and should not be relied on, for tax, legal, or accounting advice. To get advice regarding your specific tax situation or questions, please contact our office at 866-668-2953.
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