Small businesses and taxes go hand-in-hand and it is important for the success of the small business to reduce its business tax by claiming every tax deduction to which it is entitled. One small business tax deduction that people generally have questions on is the home office deduction. If you need small business tax help or have questions regarding business tax deductions, contact Austin & Larson Tax Resolution for all of you back tax needs.
Many small business owners do at least a portion of their work from their home. However, many people are not sure if they can claim a small business tax deduction for their home office. There are a lot of things to remember and be aware of when claiming a home office or when working from home. Some of the most common complexities are which method you should claim along with which expenses of the home can be claimed.
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
- Repairs and maintenance
- 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.
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.