The Home Office Deduction

One benefit of working from home is the home-office deduction. This tax benefit enables you to deduct a portion of the expenses related to operating your home-based business, including:

  • Depreciation on the portion of your home used for business purposes
  • Depreciation on business furniture and equipment
  • Property taxes and home mortgage interest
  • Insurance
  • Utilities
  • Household maintenance and repairs

To qualify for the home-office deduction, your home office must be used exclusively and regularly for business purposes. “Exclusive use” means that the portion of your home that you are claiming as a deduction must be used only for business purposes. The space needs to be clearly definable and cannot serve multiple purposes. “Regular use” means that it is your principal place of business, where you generate most of your business or meet with most of your clients.

In addition to the home-office deduction, the IRS allows you to write-off direct business expenses such as postage, supplies, advertising, and accounting services. To be deductible, an expense must meet two criteria:

1.  The expense must be ordinary. Ordinary expenses are those commonly incurred by businesses in your industry.

2.  The expense must be necessary. Necessary expenses are those that enable you to develop and maintain business.

A word of caution: If you have a home-based business and would like to take advantage of tax benefits, the IRS requires that you keep your personal and business expenses separate. This means setting up a separate bank account, keeping excellent records, and being careful not to mix business with personal expenses.

In addition to tax benefits and deductions, you will need to keep in mind tax obligations. You will be responsible for federal and state income tax, federal self-employment tax (or Social Security, Medicare and unemployment taxes), property taxes on your home, and business-related taxes such as sales tax, gross receipts or inventory tax. If you plan to have employees, your tax obligation will be slightly more involved.

It is important to note that each business situation is unique, and tax laws are subject to change. Consult up-to-date publications from the IRS and your state tax office, and work closely with a trusted CPA who can advise you on your specific tax obligations and opportunities.

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