Tax season is officially open! Sadly, this is not a phrase that many people will be rejoicing over. There are only two certainties in life and we all know what they are. When it comes to paying our taxes, we are all diligent. We have to be. But, that doesn’t mean you can’t find ways to save money on your tax bill. Who doesn’t want to save on their tax?
There are a myriad of ways that you could be eligible for to a tax deduction, especially if you have a home office.
The IRS has a ‘home office exempt’ rule. The guys at the IRS have stated that if you use any part of your home for your business, you can deduct your expenses from your taxes. That includes working from home or using it as an informal stock cupboard. What’s more, you don’t even have to own your property. Renters qualify for this too. Whether you live in an apartment, house or loft, you can qualify to receive these reductions.
Home office deductions can help you get the most out of your refund, or pay less to the government depending on the result of your taxes. The added paperwork for claiming a home office deduction can be daunting, but it’s well worth the money saving benefits. Many small business owners have accountants to help walk them through this process and make sure that there aren’t any other hidden deductions that could save them additional funds.
How do you qualify the home office deduction?
The IRS has two categories of qualifications:
- Regular and Exclusive
Use Your home must be used to run your business. If you have a separate room that you use as an office or a place of business, you may qualify for a deduction. However, you cannot claim that your living room is the place of business. You must have a separate space that you use as the office.
- Principal Place of Business
Your home is your principal place of business. So, you may not be in your home office all of the time, but you use the space to conduct your business affairs. If your business is linked to your home address, even though you have multiple locations, you may qualify for this. Other qualifications include: using your home for business storage, conducting business meetings, or storing records of your company.
Deducting Your Home Office Items and Supplies
Your home office may be jam-packed with a wealth of things that you need in your business arsenal and you can claim these too. Deducting tools and supplies essential to running your business often results in significant deductions on your taxes. Common items that you should be sure to include are: computers, laptops, phone bills, internet bills and credit card processing equipment. Even supplies such as pens, paper, staples and highlighters can be deducted. If your appearance is an important part of your business when you meet with clients, items such as clothing that was purchase for business meetings or makeup and hair cuts can also be deducted. If you take a client, or even a prospective client out to lunch to discuss the business that you are conducting with them, the meal during that meeting can be written off. In these cases, not 100% of the costs will qualify as a deduction, but portions of each claim can be applied depending on how the item is categorized.
Make sure that you keep all of your receipts for these expenses. If you have a lunch with a client, write a quick note on the back of the receipt about who you met with and what you talked about. This will come in very handy down the line if you ever find yourself in the situation of being audited.
Determining How Much Of Your Home Expenses are Applicable To Your Business
When you have a home office, parsing out what portion of your home expenses are for personal use vs. for your business can be tricky. With itemized deductions that you have a receipt for, its easy to add up a total, but how do you determine what percentage of your internet costs are used for business unless you have a separate connection, which is often inefficient and costly?
Start by determining the square footage of your property and then measuring the square footage of your home office. If your home is 2000 square feet and your office is 200 square feet, your office takes up 10% of your entire property. Keep this in mind during the next section.
The Actual Expense Method
Add up all of your home-related expenses. Take into consideration your mortgage, rent, insurance and bills costs. Essentially, these are all of your “accounts payable”. Then, using the method we described above, determine what the amount is of the percentage that your business occupies. Using our simplified example, 10% of your total expenses would be applicable as a business expense.
The Simplified Method
The IRS has many, many deductions that you can qualify for. The simplified method is to take deductions based on square feet rather than determining your total expenses. Deduct $5 per square foot of the eligible space. Using our handy equation above, that would total 200 square feet. So, $5 x 200 would ensure that you made a saving of $1000 per annum.
The method that you use is entirely up to you. It may be worth completing some rough sums so that you can see which method would save you the most. You can also consult with an accountant to make sure that you are taking advantage of all of the available deductions for small business owners.