Running a home-based business has a lot of advantages. In addition to having less overhead, there’s the convenience of having your office right in your home. But having a home office has tax advantages, too. There are a number of deductions you can take to lower your tax burden, including:
The Home Office Deduction
The Home Office deduction allows you to claim expenses associated with your home-based business. But in order to take this deduction, your business must meet certain requirements. You also have two options for calculating your deduction: simplified and detailed.
In order to qualify for this deduction, your business must meet the following two requirements:
- The space must be used as the principal place of business.
- The space must be used regularly and exclusively for business.
Calculating Your Deduction
There are two methods for calculating your deduction:
- Area Method: A simple method that divides the area used for your business by the total area of the home. If your home is 1,500 square feet and your home office is 300 square feet, your home office is 20% of your total space.
- Number-of-Rooms Method: With this method, you divide the number of rooms used for your business by the total number of rooms in the home.
In most cases, the area method is the best option as homes don’t have rooms of equal size.
If you meet the qualifications for a home office deduction, you can also deduct other home-related expenses, including:
- Homeowner’s association fees
- Mortgage insurance and interest
- Homeowner’s insurance
- Utilities, including electricity, heat, Internet and phone
- Cleaning services or supplies used in your home office
- Repairs and maintenance related exclusively to the home office
Every business can deduct the cost of their supplies regardless of whether it’s a home-based business or one with a separate location.
Supplies can include:
- Ink cartridges
- Paper clips
- Bathroom tissue
- Cleaning supplies
- Record-keeping supplies
Make sure that you save all of the receipts for your supplies. You’ll need to have proof of your purchases if the IRS ever audits you.
Furniture and Equipment
Businesses can also deduct home office furniture purchases up to $1 million. A bonus depreciation of 100% is available with certain business assets.
Both new and used furniture and equipment are eligible.
Assets that may qualify for this deduction include:
- Certain improvements to the interior of commercial property
- Office furniture
- Vehicles (SUVs, vans and pickups) weighing more than 6,000 pounds
- Machines or equipment purchased for business use
Software and Electronics
The software and electronics that you purchase for your business can also be written off, such as laptops, tablets, smartphones and other small electronics.
Items that cost less than $2,500 or less can be expensed in the first year they were purchased rather than depreciated over time. All items that cost more than $2,500 must be depreciated.
To write off computer software, it must be “off-the-shelf,” available to any consumer and used for income-producing business activity.
These are just a few of the many deductions your business may qualify for. An accountant can help you find and take advantage of all deductions your business can take.