While some people don’t have the motivation or self-discipline to successfully run a business or work from home, many thrive when given a chance to work in their pajamas.
If you have a business that you can run out of an area of your home, or if you’re working remotely for an employer full-time, you may be entitled to numerous home office tax deductions.
Who qualifies for the home office tax deduction?
According to the Internal Revenue Service (IRS), in order to qualify for a home office tax deduction, you must use part of your home as one of the following:
- Exclusively on a regular basis as your principal place of business for your trade or business;
- Exclusively on a regular basis as a place where you meet and deal with your patients, clients, or customers in the normal course of your trade or business;
- A separate structure that's not attached to your home used exclusively on a regular basis in connection with your trade or business;
- On a regular basis for storage of inventory or product samples used in your trade or business of selling products at retail or wholesale;
- For rental use; or
- As a daycare facility.
Long story short – you may qualify for deductions if your home office is where you do all your business.
If you occasionally work from home, but your main office is at another location, you won't get to deduct home office expenses.
Even if you only work from an office sometimes and do the bulk of your work from home, you might not be able to claim a home office deduction on your taxes because it’s not considered “exclusive use” of where you work.
However, some businesses, like construction companies or cleaning companies, may meet and serve clients in many different locations. But, if they do all their office work and billing from a home office, they can claim tax write-offs for their business activities.
Before launching your home business, check local laws and zoning ordinances to make sure doing so isn't prohibited in your neighborhood.
How to calculate the home office tax deduction
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.
For example, home office expenses such as printer ink, new computer equipment and your internet connection are examples of IRS-accepted deductions.
There are two ways to calculate your home office tax deduction.
Should you use the simplified method?
According to the IRS, you can deduct $5 per square foot dedicated to the business use of your home, up to $1500. Basically, if your workspace is over 300 square feet, you won’t get additional tax benefits.
Even though the simplified option saves you from recordkeeping and paperwork, you can’t deduct actual home office expenses related to your business. For example, you cannot deduct depreciation, mortgage interest or real estate taxes. However, business expenses unrelated to your home — such as marketing and employee wages — are available to deduct.
Calculating your home office tax deduction using the regular method
If you use the regular home office deduction method, you add up all actual expenses, then multiply that by the percentage of your home taken up by your business. While this method requires more precise recordkeeping so you can tally up your home expense, claiming depreciation on your home's value, as well as a percentage of the utilities and taxes is allowable.
Although this is a more complicated method of calculating a home business deduction, 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 more significant tax write-offs for your home business.
Other potential home-based business tax deductions to write-off
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 home 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 intending to make money
Does a home-based business need insurance?
Many home-based business owners overlook insurance as a necessity. But it belongs on your list of small home business essentials.
This is especially true if you keep more than a few thousand dollars worth of equipment or inventory at your home. Most homeowners’ or renters’ insurance policies won’t cover home-business losses, even though the damage occurs at home. For example, if you store $10,000 worth of products in your basement and a pipe bursts ruining your inventory, your homeowners probably won’t cover the loss.
Common home business insurance types
To help protect your business from incidents like these, commercial property insurance can help cover goods, inventory and equipment should the worst come to pass.
Additionally, whether you run a pet grooming business or a tutoring service, if your home is your office's location where you regularly meet clients, having basic general liability business insurance could protect you from the financial consequences of accidents that happen on your property.
Start by understanding your current business insurance coverage. Your homeowner's policy covers incidents that happen on your property but is designed to protect your home and personal posessions.
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.
Good news: Business insurance is often tax deductible
Be sure to claim your business insurance premiums among your home-based business tax deductions. Many small business insurance premiums may be tax-deductible, including:
- General Liability. General liability helps protect your business if you or an employee are responsible for injuring a third-party or damaging someone's property.
- Workers' Compensation. Workers' comp covers employee medical bills and lost wages if they get sick or injured on the job. Most states require this type of coverage for businesses with one or more employees.
- Professional Liability. Sometimes called errors & omissions, this type of coverage helps protect you against accusations of negligence, missed deadlines and business errors. It pays for the cost to defend yourself in a lawsuit and damages if you're found liable.
- Commercial Property. Commercial property insurance helps protect your storefront or office space from damage due to theft, vandalism, fire and other covered perils. It also covers the inventory, supplies and equipment you need to run your business. If the damage is so severe that you can't operate your business temporarily, it can help replace your income until you get your company up and running again.
- Commercial Auto. Personal auto insurance doesn't typically cover vehicles used for business purposes, but commercial auto does. However, if you deduct your commercial auto insurance premium, you can't deduct the mileage you accrue while driving for business purposes. So, you'll have to choose which deduction you want to take.
- Self-employed health insurance. If you pay for health, dental or long-term care insurance for yourself, your spouse or your dependents, you may be able to deduct the premiums if you meet specific requirements.
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 advice of a certified public accountant (CPA) or licensed tax professional with clients who own home-based businesses.
Protect your home office with NEXT
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 home business insurance coverage is easier with 24/7 online access.
NEXT 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.
Whether you're just starting or looking to grow your business, we can help. Our easy online tools can help you get a quote, purchase coverage and secure your certificate of insurance in minutes.
