The Tax Benefits of Running a Home Business

From the Editors at Intuit Small Business, Makes of Quicken and Quickbooks 

Many people who start a business out of their home do so because they want the flexibility of working from home, the freedom of being their own boss, and the satisfaction of seeing their own ideas succeed.

But there are also tax benefits to running a small business. You may be able to use your small business accounting software to claim the Home Office Tax Deduction. Here is some additional userful information:

What expenses can be deducted?
Under the Home Office Tax Deduction, the IRS allows you to deduct a proportion of expenses including utilities, rent, mortgage interest, insurance, real estate taxes, and depreciation. You may even be able to deduct some repairs and home improvement costs.     

What forms are used to claim these expenses?
Self-employed business owners use Form 8829 to figure out your home office deduction and then report those deductions on line 30 of Schedule C, Form 1040. You can use your small business accounting software to complete these forms, fill out the paperwork by hand, or have your accountant do it.

Before you start downloading forms, make sure you qualify for the deduction. Here is what the IRS is looking for:

Regular and exclusive use
The first stipulation for claiming the Home Office Tax Deduction is that you must use a part of your home to run your business on a regular and exclusive basis.

Regular use. This means using your home for work on a regular basis. In other words, if you bring some paperwork home occasionally, you won’t qualify. But if you consistently spend at least a few days per week using your small business accounting software to tally the books or completing other tasks at home, you could be eligible.

Exclusive use. Do you have a particular room—or section of a room—that you only use for business purposes? If so, you may qualify for the tax credit. The area does not need a physical boundary to count.

However, if you use that room or area for personal activities as well as business, you are not eligible. That means your kids can’t hang out in your office and use your business computer to check your email, and it also means that the time you spend using your laptop at the dining room table does not make that room eligible for the deduction.

Exceptions to the “exclusive” rule. There are two exceptions to the rule about exclusive use: if you run a daycare business, or if you store inventory for your business in your home. More information on these exceptions can be found on the IRS website.

Principal place of business
The IRS also stipulates that your home must be your principal place of business in order to qualify for the Home Office Tax Deduction. In the most straightforward cases, you run your company from only one place—your house. But if you conduct business from a number of locations, you may also be eligible if you do any of these from home:

Administrative and management tasks. These may include billing, maintaining records, ordering supplies, setting up appointments, creating reports, and other similar activities. So, if your job consists mainly of traveling around to clients’ offices or homes, you can still qualify if you consistently do admin at home.

Alternatives to principal place of business rule
Meeting with clients at your home. Additionally, you may be eligible for the tax credit if you meet with clients or customers in your home. Make sure you have a dedicated area in which to have these business meetings. If you simply sit at the kitchen table, you would not be able to claim that deduction because the table is also used for personal purposes. But if you meet up with customers in your den near your business computer, this would fulfill the requirement.

Separate structure for business. Finally, even if you do not use an area within your home for business, you can qualify for the deduction if you utilize a separate structure on your property to run your company. It does not have to be your principal place of business, but you must use it exclusively for business purposes. Examples include a converted shed or garage.

What about writing off equipment?
Even if you are not able to claim the Home Office Tax Credit, you may still be able to deduct the cost of buying certain equipment used in your home, such as installing a second telephone line for business or purchasing a photocopier for business purposes.

However, just make sure that the equipment is used for business purposes only and does not also have a personal use. For example, a computer purchased for work qualifies, but you may want to write off only a portion of its cost because it’s difficult to prove you use it exclusively for business