If you’re self-employed and work out of an office in your home, you may be entitled to home based business tax deductions. However, you must satisfy strict rules. Before we dive in more into discussing the home office deduction, be sure to review our previous article on tax rules for sole proprietors! If you qualify for a home office tax deduction, you can deduct the “direct expenses” of the home office. This includes the costs of painting or repairing the home office and depreciation deductions for furniture and fixtures used there. You can also deduct the “indirect” expenses of maintaining the office. This includes the allocable share of utility costs, depreciation and insurance for your home, as well as the allocable share of mortgage interest, real estate taxes and casualty losses.
Is your home office your “principal place of business?” If so, the costs of traveling between your home office and other work locations are tax deductible travel expenses. Whereas, in other situations, these would be non-deductible commuting costs.
And, generally, you can deduct the cost (reduced by the percentage of non-business use) of computers and related equipment that you use in your home office, in the year that they’re placed into service.
You can deduct your expenses if you meet any of these three tests:
You’re entitled to deductions if you use your home office, exclusively and regularly, as your principal place of business. Your home office is your principal place of business if it satisfies one of two tests.
You’re entitled to home office deductions if you use your home office, exclusively and regularly, to meet or deal with patients, clients, or customers. The patients, clients or customers must physically come to the office.
You’re entitled to home office deductions for a home office, if you use it exclusively and regularly for business. In addition, the location must be in a separate unattached structure on the same property as your home. For example, this could be in an unattached garage, artist’s studio or workshop.
You may also be able to deduct the expenses of certain storage space for storing inventory or product samples. Are you in the business of selling products at retail or wholesale. In addition, is your home also your sole fixed business location? If so, you can deduct home expenses allocable to space that you use to store inventory or product samples.
The amount of your home based business tax deductions is subject to limitations. This is based on the following:
However, any home office expenses that can’t be deducted because of these limitations can be carried over and deducted in later years.
Be aware that if you sell, at a profit, a home that contains (or contained) a home office, there may be tax implications. We can explain them to you.
Proper planning can be the key to claiming the maximum deduction for your home office expenses, and reducing business taxes. Contact us if you’d like to discuss your situation. We provide professional accounting services in Milwaukee, Wisconsin and Chicago, Illinois areas.