According to the SBA, about 50% of all businesses in the U.S. are home-based. More specifically, 60.1% of all businesses without paid employees are home-based, as are 23.3% of small employer companies. Despite the prevalence of home-based businesses, many owners fail to claim a home office deduction because they fear it’s an audit red flag. The truth is that there are no statistics supporting this belief, and if you qualify for the deduction you should take it.
Here are some things you can and cannot do when it comes to the home office deduction.
You can’t mix business with pleasure
One of the basic rules for taking the home office deduction is using space in a residence regularly and exclusively for business. This means you can’t claim a deduction for use of the kitchen table that you also use for meals. You can’t write off a spare bedroom used as an office by day and a TV room by night.
You can simplify calculations
If you qualify for the deduction you can write off the actual costs associated with the home office space. Instead, you can use an IRS-set rate that eliminates calculations, as well as recordkeeping for utilities and other expenses of the home. The rate for the IRS simplified option is $5 per square foot of home office space up to 300 square feet (maximum deduction of $1,500).
You can’t deduct most storage space
The exclusive use test explained earlier is waived in 2 situations: a daycare business and certain storage. So if you are in the retail or wholesale business and use space to store inventory or samples and have no other fixed location for the business, you can treat the storage area as a home office even though you might otherwise not meet the exclusive use test (e.g., you also store personal things in the same area). But other types of storage at home don’t fly. The Tax Court has denied deductions to:
- An attorney who stored client files
- A dentist who stored patient files
- A smog inspector who stored records required to be maintained by the state
You can deduct travel to and from home
Once you establish a deductible home office, then going from home to a customer, vendor, or other business location (e.g., the bank, post office, office supply company) and back again becomes deductible. Of course, you must maintain required records to support the write-off for this travel.
You can’t base a deduction on occasional phone calls
If your home office is a satellite location used to meet or deal with customers, clients, or patients, you may be able to take a home office deduction. But you have to conduct business in the space in your home. Using the home for occasional meetings and phone calls doesn’t pass IRS muster. The business conducted here must be done on a regular basis and not occasionally.
You can use the deduction for a sideline business
You don’t have to work full time in order to take a home office deduction. As long as you meet the tests for the write-off, you can take it. So, for example, if you do some consulting work on the side and use space in your home to write reports and do other tasks for your consulting business (and there’s no other fixed location for your business), you may be able to qualify for the home office deduction.
Conclusion
Whether your business is full time or part time, don’t overlook the home office deduction. You can learn more in my book J.K. Lasser’s Small Business Taxes and IRS Publication 587.
