How Can Small Business Owners Qualify for a Home Office Deduction? by Adam Cohen, CPA
Posted on September 18, 2019
by
Adam Cohen
Small-business owners who use a portion of their homes regularly and exclusively for business purposes may qualify for a home office deduction that can help them save money of their taxes and improve their bottom line.
For purposes of claiming this deduction, a home is defined as a house, apartment, condominium, mobile home, boat or unattached garage, studio or other structure that a taxpayer owns or leases and uses as his or her “main place of business”. Therefore, the home must be the location where the taxpayer meets patients, clients or customers in the normal course of business or the fixed location where he or she stores inventory or samples. The home must also meet the following basic requirements:
- There must be exclusive use of a portion of the home for conducting business on a regularly basis. For example, a taxpayer who regularly and exclusively uses a room in their home to run his or her business can take a home office deduction only for that extra room.
- The home must be the taxpayer’s principal place of business or the place where he or she conducts administrative or management activities when no other location exists to perform these duties. For example, someone who conducts business outside of their home but pays bills or manages administrative tasks from that home may still qualify for a home office deduction.
Taxpayers who meet these requirements may qualify to deduct certain expenses they incur for managing their homes, including mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent. However, it is important to note that the amount of the allowable deduction may be limited to the net income of the business. While these allocable expenses cannot create a business loss, they can be carried forward to the next year when they would be subject to the same loss limitation rules.
Using the regular method for computing the home office deduction requires taxpayers to keep diligent records and divide these expenses of operating the home between personal and business use. Taxpayers have the option to instead use a simplified method and apply a standard deduction of $5 per square foot to the area of the home that is used exclusively and regularly for work purposes when that area covers 300 square feet of space or less. When taxpayers use this method, they lose the abilities to claim a depreciation deduction for business use of a home and to carry forward any amount of the deduction in excess of the gross income limitation.
About the Author: Adam Cohen, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via e-mail at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
← Previous
