Like many inDinero employees and clients, I run a small business out of my home. The entrepreneurial spirit is an essential prerequisite for working at inDinero—and claiming all the tax deductions you can is a key part of succeeding as an entrepreneur.
Over the years, I’ve found that nothing saves my little book editing business more money than claiming the home office deduction when I file my income taxes each year.
This completely legitimate option lowers my taxable business income and allows me to transform many personal expenses into tax savings.
How to Claim the Tax Deduction
1. Claim the deduction—don't be scared
The IRS is not known for transparency, which scares a lot of people off. 26 million Americans have home offices , but just 3.4 million taxpayers claim home-office deductions. That’s silly.
Deductions are the same as money earned. And like most money, you have to work for it—in this case, the effort involves filling out some extra sections of your 1040 Schedule C. (This deduction is for your personal income taxes, not LLC, S-Corp, or other corporate taxes.)
- you use your office to manage a trade or business (if you’re an interior designer or an IT consultant who does most of your work onsite this still counts)
- there is no other fixed location where you conduct substantial administrative or management activities for the trade or business.
So if your company has a brick-and-mortar office and you occasionally work from home, the deduction won’t count. But if you have a space that you could use at your brick-and-mortar, and you choose not to, you can still claim the home office deduction.
You can also claim a home office deduction if you’re an employee and your employer doesn’t have a place for you to work. You still have to meet the criteria above. In addition:
- Your business use must be for the convenience of your employer.
- You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.
If your home office is just a nice-to-have, but you don’t really need it, you shouldn’t claim the deduction. And if you sometimes work from home at the table in your guest room, don’t try to claim it.
2. Two words: regular and exclusive
If you want to write off a home office, it must be used exclusively and on a regular basis. It can be your office or a studio or the exam room where you meet with clients or patients.
The key is that the area must be used only for work—not occasionally for yoga or guests or a tarantula playground. It doesn’t have to be the entire room, but the area must be used only for work, and the boundaries must be clear. For example, my home office is in a multipurpose room, but everything located on my 7x9 area rug is used exclusively for book editing.
You don’t have to use your office every day, just on a regular basis. I use my office regularly, but only on the weekends. If you use your office to meet with clients, a few meetings over the course of the year won’t cut it.
However, if your home office is a separate structure, if you use it to store inventory, or if you operate a daycare, the rules are a bit more flexible.
3. Get this: The deduction is actually several separate deductions
This is the best part!
Your deduction is based on a simple calculation: the area of your dedicated office divided by the area of your home. That percentage is applied to a bunch of little deductions that add up quickly. So if the area of your office is 10% of your home, you’ll be able to deduct 10% of many of your regular expenses including:
- rent or home mortgage interest
- utility bills
- home repairs
So break out your tape measure—you’ll need to know the area of your home and the percentage that comprises your office. Fractions in action!
4. Choose your own adventure
The IRS has recently simplified the home office deduction. That’s right, the IRS made something easier! As of 2013, you can now deduct up to $1500 per year, based on $5 per square foot for up to 300 square feet.
Or, you can still go the old, more complicated route if your office is larger or if all your deductions would amount to more than $1500.
With either route, you’ll easily be more than compensated for the time you (or your tax professional) spends claiming the deduction.