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Recent Posts:

  • A Home Office Increases Your Tax Deductions

  • Small Business Owners Need Accounting Systems Too

  • Understanding What Your Schedule C Says About Your Business

  • Delivering More Value: Outsourcing your Small Business Accounting Needs

  • Virtual Accounting Solves Your 7 Biggest Small Business Accounting Problems

  • 9 Methods for Increasing Your Small Business Cash Flow

  • Year-End Accounting Practices for Your Small Business

  • Tips for Avoiding Small Business Tax Mistakes

  • A Home Office Increases Your Tax Deductions

    If you are self-employed and have a home office, you may qualify to claim a home office deduction. This means you can deduct expenses for the business use of your home.

    “If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters and applies to all types of homes.” IRS

    Did you know that a home office also increases your business miles? Traveling from your home office to a business destination--whether it's meeting clients, picking up supplies or visiting a job site--counts as business miles.

    Am I eligible to take a Home Office Deduction?

    If not done so, you should first ask yourself, "Is a Home Based Business Right for Me?" and understand "What Legal Requiements Might Affect A Home Based Business?".

    The IRS allows deductions related to home office expenses if the space is used "exclusively" on a "regular basis" for business. To qualify for a home office deduction, you must meet one of the following requirements:

    1. Exclusive and regular use as your principal place of business.
    2. A place for meeting with clients or customers in the ordinary course of business.
    3. A place for the taxpayer to perform administrative or management activities associated with the business, provided there is no other fixed location from which the taxpayer conducts a substantial amount of such administrative or management activities.

    A separate structure not attached to your home may qualify too.

    The exclusive use test is satisfied if a specific portion of the taxpayer's home is used solely for business purposes or inventory storage. The regular basis test is satisfied if the space is used on a continuing basis for business purposes. Supplementary business use does not qualify.

    In determining the principal place of business, the IRS considers two factors:

    1. Does the taxpayer spend more business-related time in the home office than anywhere else?
    2. Are the most significant revenue generating activities performed in the home office?

    Both factors must be considered when determining the principal place of business.

    Avoid Common Mistakes Made When Claiming The Home Office Deduction

    You have two options for calculating the amount of your deduction. One is far simpler, but with limitations; however, both methods have the same qualifications.

    • Simplified/Optional Method:  Reduces paperwork and recordkeeping burdens on small businesses. It is capped at $1,500 a year, based on $5 a square foot, for up to 300 square feet. A few things to consider:
      • You can't take a depreciation deduction for your home.
      • You can't use the deduction to take a business loss.
      • You can't carry over losses from the use of the regular method in a previous year.
    • Regular/Actual Method:  Is more complicated and requires the completion of Form 8829.  This requires that you determine the percentage of the total area of your home, then the area that you use exclusively for business purposes.
      • You can't include expenses for the home that have nothing to do with your business.

    Home office expenses are classified into three categories:

    • Direct, which relate to expenses incurred for the business part of your home such as additional phone lines, long-distance calls and optional phone services.
    • Indirect are expenditures related to running your home such as mortgage interest, insurance, real estate taxes, utilities, repairs and depreciation
    • Unrelated, such as lawn care, are not deductible.

    Direct expenses are 100% deductible, yet indirect expenses are proportionately deductible.  E.g., Total allowable indirect expenses for your entire home is $10,000 for the tax year; and your home office space is 10% of your home. You’d save $1,000 on your home office expense, by claiming this deduction.

    A Few Misconceptions & Concerns

    The Home Office Deduction Is a Red Flag for an Audit

    While it used to be a red flag, this is no longer true if you keep excellent records that satisfy IRS requirements. Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. In other words, there is no need to fear an audit just because you take the home office deduction. A high deduction-to-income ratio, however, may raise a red flag and lead to an audit.

    Business Expenses Are Not Deductible if You Don't Take the Home Office Deduction

    You are still eligible to take “Direct Expenses” deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business and other expenses related to running a home-based business, whether you take the home office deduction.

    Things to Watch Out For

    If you plan on deducting actual expenses, keep detailed records of all business expenses you think you’ll deduct, such as receipts for equipment purchases, electric bills, utility bills and repairs. If you’re ever audited by the IRS, you’ll be prepared to back up your claims.  Here's a Record Retention Guide for referencing.

    If you're a homeowner and you take the home office deduction using the actual-expense method, you’ll need to consider capital gains and/or depreciation recapture. On the other hand, if you use the simplified method, depreciation shouldn’t be a factor.

    What to Keep In Mind

    Anything beyond being taxed as a Disregarded Entity (Schedule C Filer), we’d suggest that you consult with a credentialed tax professional, ASAP, to ensure that you have an Accountable Reimbursement Plan in place.  Here's more information about "Choosing The Tax Treatment". Reference our blog, "Understanding What Your Schedule C Says About Your Business" for tips & insights for Schedule C filers.

    You should make sure that you are familiar with both the IRS and your local government regulations for running a Home Office.  We suggest reviewing your city’s “Home Based Business Tax Affidavit” to ensure compliance. 

    Also, every business situation is unique, and not all home businesses are treated the same, Day Care Providers being one of them.

    If you’d like to understand more about the Home Office Deduction, read the IRS Publication 587 “Business Use of Your Home” or consult with an experienced accountant.

    Are you properly maximizing your Home Office Tax Deductions? 

    As a Small Business Owner, who works from home, you could save big money by taking the home office deduction, if certain IRS requirements are met and good record keeping stardards are followed.  Which can also increase your business miles too, for an even larger deduction.

    If you’d like to further discuss your Home Office Deduction, Accounting of the Palm Beaches, LLC (AOTPB) is here for you!  We are fully insured and virtually capable of handling your accounting needs, both near and beyond. We use professional accounting software, professional tax software and a HIPAA compliant CRM system, to assist us in managing your accounting data. Our firm has AICPA credentialed, Professional Liability and Cybersecurity Insurance.  We are compliant and ready to assist you with your accounting needs.  Just click the below button to get started.

    Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.

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