Rules and Eligibility for Home Based Business Tax Deductions

rules and eligibility for home based business tax deductionsIf 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.

Taking Your Travels Into Account

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.

Computers & Other Equipment

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.

Tests to Qualify for Home Based Business Tax Deductions

You can deduct your expenses if you meet any of these three tests:

Principal Place of Business

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 satisfy the “management or administrative activities test.” This includes using your home office for administrative or management activities of your business and meeting other requirements.
  • You meet the “relative importance test.” This test is if your home office is the most important place where you conduct business, in comparison with all the other locations where you conduct that business.

Meeting Place

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.

Separate Structure

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.

Deduction Limitations

The amount of your home based business tax deductions is subject to limitations. This is based on the following:

  • The income attributable to your use of the office.
  • Your residence-based deductions that aren’t dependent on use of your home for business. A couple examples include mortgage interest and real estate taxes.
  • Your business deductions that aren’t attributable to your use of the home office.

However, any home office expenses that can’t be deducted because of these limitations can be carried over and deducted in later years.

Selling the Home

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.

Pin Down the Best Tax Treatment

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.