Proper tax planning can help you maximize the returns from your business. Knowing what expenses can be deducted from your Tax enables you to maximize use of your funds. Even if you eventually qualify for a tax refund due to over paying, the money could’ve been used in the meantime to grow your business.
The use of your home for business and employment purposes can actually qualify you for a tax deduction. However, there are very specific guidelines that must be followed before you can file it. It’s always best to inquire with the IRS online at their website or with a knowledgeable CPA.
Deducting items related to your home like your mortgage interest and real estate taxes is possible but brings its own set of complications. A few entrepreneurs skip this part as it can affect the tax prepared for their own home. In cases like this, getting expert advice is recommended as each home business‘ situation is unique.
Here’s a short summary on how you can qualify:
- Exclusive and regular use of the home space as your principal place of business.
- Exclusive and regular use of the home space for meeting and dealing with patients, clients or customers for trade or business purposes
- If it’s a separate structure that is not attached to your home, then it should be used primarily for trade and business.
- Regular use as storage for trade or business related items.
- As a daycare facility
- For employees who work at home, they must be using the space for the convenience of the employer and must not be renting it to them.
Exclusive use is defined as using a portion of your home purely for business reasons. If the space is used for other purposes then it doesn’t apply. If you’re using your dining table for work and eating family meals, then it won’t qualify.
Please note that there are exceptions to exclusive use requirement. This applies if a portion of the home is used for storage of inventory or product samples and if it’s used as a daycare facility.
The definition for Regular use is straightforward. You have to use the space regularly, and not incidentally or occasionally. You probably can’t get a deduction if you only use your home office only during the weekends.
To qualify as Trade or Business use, the part of your home designated for trade or business must deal only with these types of profit seeking activity. If your activity doesn’t involve any investments, which is the case for brokers and dealers, you can’t take a deduction for trade or business use of your home.
Principal Place of Business requirement depends a lot on the relative importance of the duties being performed in the designated home space and the amount of time spent working there.
A home office can be considered the Principal place of business if: it’s used exclusively and regularly for administrative or managements activities of the trade or business; there is no other location being used for substantial administrative or management activities of the trade or business.
There are several more detailed conditions that need to be met before you can finally add use of your home as a deduction. Details are further clarified in the official IRS publication. If you leave outside the US, you should check your local tax laws for similar deductions applicable to your homebased business.
This article is a short summary that discusses how to qualify for use of home use tax deduction. Since we are not licensed to give tax advice its best to talk with a registered CPA or visit the official IRS websites. Information can and often changes every tax season. Keep yourself informed.