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Tax Deduction for Home Office – Learn about Home Business Write-Offs

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By Next Insurance Staff
Jun 2, 2020 min read

While working from home isn’t for everyone, it’s a great way to eliminate many overhead expenses for entrepreneurs who don’t require a dedicated work address. If you have the space to set up a home office and can avoid renting, you can put the savings toward growing your business. 

Before you decide to run your business from home, think carefully about how important it is for you to interact with other people face-to-face throughout the day. Can you remain focused without a supervisor offering direction? 

Consider your natural troubleshooting abilities. As a work-from-home business owner, you’ll be in charge of everything from fixing computer problems to interacting with clients. Some people thrive on the solitude of a work-from-home environment. Others may find it lonely and have problems staying motivated. 

It’s also crucial to consider your location and your type of business. Will you need to meet with clients in your office? Do you have a 100% reliable internet connection? Is there room in your home to set up an office that’s away from family activities and normal household noise? 

What Qualifies as a Home Office?

Your home office must be the place where you exclusively do business. If you work from an office and sometimes also work from home, you can’t claim a home office deduction on your taxes. 

Some businesses, like construction companies or cleaning companies, may meet and serve clients in many different locations. However, if they do their office work and billing from a home office, they can claim tax write-offs for a home business. 

You may have an employer, but they require you to work from home. In this case, you can also take advantage of home business tax deductions so long as you don’t charge your employer rent. If you occasionally work from home for your own convenience but your main office is at another location, you won’t get to deduct home office expenses. 

Before launching your home business, check local laws and zoning ordinances to make sure doing so isn’t prohibited in your neighborhood. 

What’s a Deductible Expense for Your Home Office? 

As an entrepreneur working from home, claiming home office expenses is an important part of maximizing your profit. Home-based business deductions must be classified as both necessary and ordinary by the IRS. Home office expenses such as printer ink, new computer equipment, and your internet connection are examples of IRS-accepted deductions

According to the IRS, you can deduct $5 for every square foot dedicated to the business use of your home, up to 300 square feet. You can’t deduct actual home office expenses related to your business except those not related to your home if you use this simplified method to figure your home office tax deduction. For example, you cannot deduct depreciation as an expense in your list of tax write-offs for your home business. 

If you use the traditional home office deduction method, you can claim depreciation on your home’s value, as well as a percentage of the utilities and taxes. This is a more complicated method of calculating a home business deduction, but modern tax software handles the calculations automatically. Your tax software may also compare the traditional tax deduction for a home office to the simplified method to see which earns you larger tax write-offs for your home business. 

Here are some home office business expenses you may be able to deduct as a self-employed person:

  • Work-related education, including transportation to and from classes, tuition, books, and supplies
  • Part of your rent or mortgage and expenses related to making repairs or improvements to your office space
  • Mileage fees for handling work-related business using your car; meeting clients at a coffee shop, picking up supplies, meeting with your banker to get a business loan

While it may be tempting, you can’t legally claim these expenses as home office expense deductions: 

  • Costs of traveling for business when you were also traveling for personal reasons
  • The square footage of an entire room when you only use one corner with a desk for business purposes
  • Losses for a business that’s actually a hobby that you aren’t running with the intention of making money
Home Business Write-Offs

Does a Home-Based Business Need Insurance? 

Many home-based business owners overlook insurance as a necessity. It belongs on your list of small home business essentials, however. Whether you run a window cleaning business or a tutoring service, if your home is your office’s location, having basic liability business insurance could protect you from the financial consequences of accidents that happen on your property. 

Start by understanding your current insurance coverage. Your homeowner’s policy covers incidents that happen on your property but may exclude accidents suffered by people visiting you for business purposes. 

For example, contractors’ insurance may cover trucks, tools, and equipment used off-site, but if you run your business out of your home, make sure that your computer and any tools kept at home are also covered under your business insurance policy. 

Choosing Business Insurance for a Home-Based Business

Having the right kind of insurance is an essential part of any comprehensive business plan. This is especially true if you keep more than a few thousand dollars worth of equipment or inventory at your home. For example, if you store $10,000 worth of products in your basement and there’s a flood, you may suffer a significant financial loss without business insurance. 

Be sure to claim your business insurance premiums among your home based business tax deductions. When claiming home office expenses, use a trustworthy and highly-rated tax software package designed for small business owners. You may also benefit from seeking the professional advice of an accountant with clients who own home-based businesses. 

As your business grows and changes, revisit your insurance coverage to verify that it’s offering the right level of protection. For busy entrepreneurs, managing a business insurance policy is easier with 24/7 online access. Next Insurance offers tailored, affordable, and simple insurance policies to meet the needs of small home based businesses just starting out. As you grow, your insurance can grow with you. 

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By Next Insurance Staff
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