If you work out of a Home Office, then this article is for you.
There are three key factors that go into getting the home office tax deduction. These are:
- Determining what qualifies as a home office.
- Calculating the tax deduction.
- The type of business you have.
Let’s take a closer look at these components.
What Qualifies as a Home Office?
For your at-home workspace to be considered a home office, it must be used regularly and exclusively for your business.
“Regularly” means that space is used consistently and often. In other words, using the space occasionally, or briefly on an inconsistent basis is not considered regular use.
“Exclusively” means that this space must serve only as a workspace. Your kitchen, for example, does not qualify, because it is used for purposes other than your business. A desk in the corner of a room is acceptable. However it is important to ensure that space is not used for things other than work.
Essentially, in order to qualify, the home office needs to be the principal place of business. Either you need to spend most of the working day there, or it needs to be the place where you handle all of your administrative and management work. For example, if you are a plumber and drive to jobs throughout the day, you would use this space to handle office matters.
Calculating the Tax Deduction
There are two methods to calculate the home office tax deduction.
- The Ratio Method – This method involves a ratio of the square feet of your office, compared to the square feet of your home, multiplied by utilities, rent, real estate taxes, mortgage interest, telephone, internet, and insurance.
- The Simplified Method – Simply, use $5 per square foot, for up to 300 square feet.
If you are not sure which method is right for you, feel free to call our firm at 678-235-5460 for more information.
Type of Business
The final element to consider is the type of business you have. Each of the following business types are eligible for home office tax deductions:
- Limited Liability Company (LLC)
- Partnerships. The partners can deduct home office expenses on their personal tax returns.
Accountable Plans for S Corporations
A business that is formed as an S corporation, or an LLC with an S corporation election, may create an accountable plan to reimburse the owner-employee for home office expenses. This is a great method to ensure that the owner, who is also an employee of the S corporation, gets the tax deductions for the home office. These expenses will be passed through to the owner from the entity via their K-1.
Without the accountable plan, the home office would be deemed to be the personal expenses of the owner-employee and would not be deductible, especially after the elimination of itemized miscellaneous deductions on Schedule A of Form 1040.
Give us a call to learn about adopting an accountable plan. It is a great tax planning idea.
IRS Audits and the Home Office
Keep in mind that home office deductions are perfectly legitimate business expenses and maybe deducted with confidence in tax returns. Nevertheless, they are on the IRS radar as a potential area of abuse. So, be sure that you meet all the rules. For example, a home office must be a place where you routinely meet clients. Alternatively, it must be your primary place of business. In addition, the office space must be solely for business. However, there is an exception for elder care and daycare centers, where mixed-use facilities are allowed.
Lastly, be careful that the size of your home office, expressed as a percentage of your entire home, is correctly reported on your tax return. IRS auditors have been known to visit home offices with a tape measure. So be exact.
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Massey and Company CPA is a boutique accounting firm located in Atlanta, Georgia serving the tax and accounting needs of small businesses and individuals throughout Georgia.