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How to Track Tax Deductions for Your Home Office

If you’re a solopreneur or run a small startup, there’s a good chance that you work–at least part of the time–out of a home-based office. Smart choice! A home office saves on overhead, makes your workday more flexible, and eliminates the time and expense of commuting.

With a home office, you will want to take advantage of all available tax deductions while avoiding anything that might attract an audit by the IRS. As long as your deductions are legitimate and proportionate to your income, they should accept them without question. Correctly tracking your home office deductions can save you money come tax time.

Who Qualifies for Home Office Deductions?

Self-employed workers qualify for home office deductions. You could be an independent contractor, sole proprietor or part of a partnership. That last one comes with some caveats, which we will cover in a moment. As of 2018, salaried employees do not qualify for home office deductions, even if they work entirely from home. 

What Counts as a Home Office for Tax Purposes

To take a home office tax deduction, you must have:

  • A dedicated workspace that takes up at least 20% of your house
  • It must serve as your primary place of business
  • The room must not be used for other purposes, like a guest room or playroom
  • It may be a separate structure from your house, on the same property.
  • Your home office can be a portion of a basement, if that portion is clearly designated as a workspace and not used for other purposes. 

Simplified Home Office Deduction

The IRS began offering a simplified option for home office deductions in 2013, as the gig economy gained traction. If your business is just you and you meet all of the above criteria, you may prefer this option. It lets you claim $5 per square foot of home office space, up to 300 square feet or $1,500. You will fill out Schedule C. A tax professional can help you decide whether to use this option or if you could gain a bigger financial advantage by itemizing expenses. 

Direct Expenses

The first category of expenses you can choose to itemize are direct expenses, those that stem solely from business activities. When you itemize your tax deductions, you can claim these costs in full:

  • Office furniture
  • Computers and related equipment
  • Office supplies
  • Renovation or repainting of the office itself
  • Gas, airfare, lodging and other travel expenses 

Indirect Expenses

Indirect expenses are a percentage of the costs of owning or renting your home. The percentage would be based on the amount of space in the home that is used for business. You will need to know the square footage of your whole home and of your home office. These include:

  • Mortgage interest or rent
  • Property taxes
  • Homeowners insurance
  • Home maintenance services and materials
  • Utilities
  • Internet and cell phone bills, based on a percentage of use for business

Direct and indirect expenses can be itemized using Form 8829.

Partnerships and LLCs

If you own a business in partnership with one or more others, tax filing becomes a bit more complex. LLCs can deduct business expenses using the simplified or regular method, although they do not get the indirect expenses. Each member of the partnership will be responsible for claiming their own expenses not reimbursed by the LLC. Partners can deduct:

  • Office supplies
  • Office furniture
  • Equipment, such as phones, used exclusively for business
  • Rent, based on the percentage of the space used exclusively for business

 

Note that an LLC cannot deduct any personal utilities or mortgage payments. Also, when it comes to property, they should prepare a depreciation schedule to write off the expenses over time. A CPA or business advisor can help with this.

Keeping Records of Home Office Expenses

When tracking home office expenses, keep careful records of everything. When in doubt, track it. Keep receipts, profit and loss statements, and detailed expense ledgers. Solopreneurs must log monthly, quarterly, and annual profit and loss statements. 

Regular meetings with a business advisor can guide you through the year to help ensure that you keep your records up-to-date and accurate. When it comes to recording your self-employment finances, you can choose between cash and accrual accounting.  Your advisor can recommend the best method for your business.

Other Important Facts About Home Office Deductions

  • The home office deduction is available for homeowners and renters
  • It applies to all types of homes
  • The IRS provides detailed information about business use of your home

 

As with all business tax matters, details will vary from person to person and company to company. Always consult with a professional to ensure that you keep the right records and take advantage of all the deductions to which you’re entitled.