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.
1. 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. 2. 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.
3. 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, or LLC
- Partnerships (The partners can deduct home office expenses on their personal tax returns)
Owners of S Corporations are employees and may not use this tax deduction. The solution to this is for them to adopt an accountable plan. This way, the owner can be reimbursed tax free and the business takes a deduction for the related expenses. Give us a call to learn about adopting an accountable plan.
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