It's tax season, and most of us are focused on preparing and filing tax returns. You may file your return yourself or hire a tax preparation firm that provides small business accounting services. Either way, make sure you consider one key way to reduce your tax bill: the home office deduction.
If a part of your home is used for your business, you may be able to deduct home office expenses. The home office deduction is available for homeowners and renters and applies to all types of homes. The IRS provides guidance on eligibility – help for taxpayers to determine if they can legitimately use the deduction.
IRS Publication 587 says, “To qualify to deduct expenses for business use of your home, you must use part of your home … exclusively and regularly as your principal place of business.”
Is it exclusive space?
What does that mean? The space you assign for your home office must be used exclusively as your principal place of business. Here’s what the IRS means by exclusive:
- It has to be a “separately identifiable space” and used exclusively for business. It doesn’t have to be walled off or of any particular size.
- It can’t be used for personal purposes. That means that it can't double as a guest room or a space for any personal or family activity during business off-hours.
- Under some particular circumstances, employees can deduct home office expenses. The company must requests that you do so. It cannot be for reasons of your convenience.
Is it the principal place?
The other major tricky term is “principal.” Here’s what the IRS means by that:
- You can claim the deduction even if you use more than one place for your business. But you can only claim the home office if it's where you do the majority of the work or certain kinds of work.
- If you travel or visit other businesses or homes as part of your work, you can still claim the home office deduction. It's considered a valid deduction if you use it "exclusively and regularly for administrative or management activities" such as billing, record keeping, ordering, writing reports or booking appointments.
- Do you use a space in your home exclusively and regularly to meet with clients, patients or customers? If so, it may qualify for the deduction without being your primary place of business. You have to have in-person meetings on a regular basis - phone calls don't count.
- A partial deduction is legitimate if you met the requirements for only part of the year.
Take every deduction for which you are legally entitled. When it comes to the home office deduction, make sure that you follow the IRS guidelines and can verify that you do so. If you are uncertain about any aspect of your eligibility for the home office deduction, contact the professional expertise found in tax preparation services.
Charles P Myrick CPA, Washington DC tax preparation firm, specializes in accounting services for small business start ups and entrepreneurs. If you are a new entrepreneur, give us a call. We invite you to learn more about the small business accounting services that are available: (202) 789-8898.