Qualifying for a Tax Deduction
Entrepreneurs who work from home can write off a portion of their housing and utility expenses.
A sole proprietor who uses 25% of her house as an office, for example, can deduct 25% of her rent or mortgage interest, property tax, homeowners or renter’s insurance, and utilities.
To qualify for the home office deduction, entrepreneurs must have a dedicated space in their home that they use exclusively and regularly for business. IRS agents often focus on these two factors when auditing tax returns claiming the home office deduction. So, it’s important you know what each of these factors mean.
- Dedicated space used exclusively for business. A home office doesn’t have to be an entire room. It could be a desk and file cabinet sitting in a corner of a room. But, this area of the house must be used only for business, and nothing else. Using the room for recreation or having the kids do their homework at the desk means that the space is not exclusively used for business. And that would result in no home office deduction for that space.
- Regularly and consistently use the space for business. You don’t have to work in your home office every single day. But you do need to use the space for business on a regular basis. Working from home only occasionally isn’t sufficient. A dentist who sees clients in her home office only in emergencies, for example, might not be using the space regularly enough to qualify for the deduction.
- Storage of inventory. If you run a wholesale or retail business, you can also take a home office deduction for the area used to store your inventory and product samples. This storage area does not need to meet the exclusive use test. As long as you use the storage area on a regular basis, we can deduct the storage area in addition to the space you use for conducting business. This is a valuable deduction for eBay sellers and other merchants whose home is the only fixed location for their business.
- Childcare, senior care, and adult daycare. Day care providers can deduct the area of the home used for providing daycare services. The area doesn’t have to be used exclusively for business. Instead, we take a deduction based on the amount of time the area is used for business.
Let us know if you work from home. We want to be armed with facts in case the IRS decides to ask any questions.