Congratulations! You’ve started your own business and work from home. Finally, you can wake up in your pajamas, enjoy a hot cup of coffee, and get those emails done from the comfort of your lovely abode. The best part is you may even qualify for home office deductions that save you money on taxes.
With a little advice from C&D, we’ll help you determine what counts as a deduction and what may disqualify your home office from consideration.
What Qualifies as a Home Office Deduction?
Take a look around your “office.” Maybe you have a rich mahogany desk and a brand new laptop next to a lush succulent plant. Perhaps there are color-coated sticky notes littered on top of specific client folders. Behind your new leather-bound chair is a well-organized shelf stocked with a printer, scanner, and other essential files organized by dividers you picked up at your local Staples. Oh, and it just so happens to be adjacent to your kitchen and downstairs from your master bedroom.
This may or may not look a lot like your home office. But you could consider everything in this room for home office deductions. Even utility bills, like the internet and electricity, could save you money on taxes. Whether you own your business as a sole proprietor or in a partnership, as long as you use your office exclusively for business, it could fall under the home deductions category.
What Doesn’t Qualify?
Not all expenses qualify as home office deductions. But there are some that surprisingly do. How does your home office stack up?
Allotting Your Deductions
Principal Place of Business
This IRS requirement means you use your home office exclusively for regular business hours during the workday. So that means that it’s not also your personal gym, bedroom, or dining room.
Simplified Square Footage Method
According to the IRS, this simplified option multiplies a prescribed rate by the allowable square footage of the office. It’s helpful when your actual expenses are far too complicated to determine yourself.
Expenses
If the value of your office isn’t as simple as adding up the square footage, then you must keep a detailed record of all business expenses. For instance, keep receipts for direct expenses like laptops, printers, and long-distance business calls. Indirect expenses are just as acceptable for home office deductions, so hang onto receipts from your utility bills, homeowners insurance, repairs, and more.
It’s important to note that you can no longer deduct these expenses if you are still an employee working from home. Although California does not comply with this rule so you may still qualify for a state deduction.
How It All Adds Up
Properly allocating all of your home office deductions can be a complicated task but it doesn’t have to trigger a red flag for an IRS audit. Your qualifications for deductions are determined each year, and the simplified method may not be your best bet. C&D provides management services, as part of your tax return preparation, that calculates all of your home office deductions for you. Contact us, and we’ll help you save money on your home office. Working from home has more benefits than just basking in your pajamas all day long.
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