Well here we are again… tax season! The time of year that if you are a business owner like myself most likely dread when it comes to gathering up all of that information and wondering what else you may have missed (no matter how meticulous those records are).
One thing that I do know is if you run a home based business like myself is that you may not be aware of exactly how to use that as a write off or what you can account for at tax time. So, below is a very simple guide to help you understand the home office deduction and what you should keep track of all year.
NOTE: The information contained in this post is simply meant to help you understand home office deductions. You should speak with your accountant or other tax professional for guidelines and guidance specific to you and your home based business.
You can claim a home office deduction for the area in your home that you use exclusively for your business. So in my case I have a small spare bedroom that is used only for my desk, computer, sample stock, anything and everything Slender Suzie. The word “exclusively” means that that area is used mainly for your business. If your business is like mine, you don’t have to meet this rule if all of the following are true:
- You use part of your home to store inventory or product samples.
- You keep them for use in your trade or business.
- Your home is the only fixed location of your business.
- You use the storage space on a regular basis, and the space is an identifiable one and suitable for storage
You need to be using that room on a regular basis to conduct your business. That means you use it repeatedly and continually. If you only step foot int here once in a while then it does not count. This means you use it to conduct administrative or management tasks and you have no other fixed location where you conduct substantial administrative or management tasks or as the place where you meet or deal with patients, clients or customers. It can also mean using a separate structure in connection with your trade or business if this structure is not attached to your house or residence (such as a detached garage – which is where my hubby’s home based business is soon to be located IF i don’t snag it for a garage gym first hehehe).
Now last year we had moved so I was able to write off two home offices, one of each address. You can write off the two IF you had a home office for the same business in both locations. The home were you live and be owned or rented also. Just because you are a renter does not mean you should not write off your home office – its a deduction, you pay rent just like a homeowner would pay a mortgage, so take your deduction!
Now, you will need to know your home’s square footage as well as the square footage of your home office space. This is THE most important step in taking a home office deduction. Everything that is calculated is based on these numbers. Your home office space is the percentage of your home (such as an entire room, or part of a room such as the area filled by a desk, chair, and filing cabinet) that actually gets used for your business.
Now there are two ways to write off this space once you have your square footage calculated. The first is a standard deduction which means you did not track anything all year expense wise – this method simply takes your home office square footage and multiples it by $5.00 and thats what you get – simple and no tracking needed (this is sometimes called the “simplified method”). The second is where you actually track all of your home’s expenses. This is what we will discuss below so you know what exact to keep track of to maximize that deduction:
- You will need to keep track of all of your rent and/or mortgage payments for the year
- You will need to keep track of all of the utilities paid all year for your home. This includes: gas and electric, water, sewer and septic system services, trash removal, and heating oil.
- Keep track of all repairs and any maintenance expenses for your home. This would include things like painting the house (inside or outside), fixing your furnace, etc. BUT, anything you repair that benefit only part of your home, but not your home office, such as painting your kitchen, cannot be counted as a home office expense so basically the expenses must either benefit your entire home, or specifically your home office.
- Other expenses that you should track and include would be carpet and window cleaning, housekeeping services, home security maintenance or dues, HOA fees, snow removal and lawn care, pest extermination fees, and any other expense that benefits your entire home or specifically your home office.
Now if you do your taxes with a program such a s TurboTax you can go through and enter your deductions as above and then multiple you square footage by $5 and see which gives you the bigger deduction then go with that. One last note you cannot deduct more than the net profit your business makes each year BUT like other operating losses, you can carry these forward into future tax years. So either way its a win win!