Home Office Tax Savings

Home Office Design : Jeremy Levine Design

According to an article in the September Fortune Small Business Magazine nearly half of American firms are home-based businesses.  And, only 46% of these businesses take advantage of the home office tax credit (taken from the National Federation of Independent Business Survey).   The NFIB survey found that the credit calculation was complicated to many small business owners.  Are you taking this credit?  If not, let’s do it!

Home Office Tax Credit Requirements

The IRS says that to qualify for this credit, you must use your home for one of the following:

1. Exclusively and regularly as either: your principal place of business, or as a place to meet or deal with patients, clients or customers in the normal course of your business.
2. On a regular basis for certain storage use — such as storing inventory or product samples — as rental property, or as a home daycare facility.

Hmmm… I know these apply to many small businesses in the wedding industry!

Calculating the tax deduction

So, how do we calculate the deduction?  The forms make it a little tricky so I recommend you talk to a tax professional.  I’m going to break this down into simpler terms.

Calculate the area of your home that you use for your office:

Area of office 200 sq ft
Area of home 1000 sq ft

= 200 / 1000 = 20% of your home is used for your office

Next calculate all of your home’s expenses (this includes insurance, utilities, repairs… if you own include mortgage interest… if you rent include your rent expense).  Total all of these expenses for the year:

Rent on home   $9000
Utilities                $1000

TOTAL =              $10,000 annual home expense

Now take your percentage of home used for biz 20% and apply to your expenses $10,000.  You are left with with $2000 of home expenses that you can deduct. The IRS also allow additional write-offs including depreciation on the home if you own it.

How to get the credit

When it comes to filing your taxes, and if you file a 1040, you’ll be filling out:

• 1040 – personal income return
• Schedule C – reports your business income (totals flow into the 1040)
• 8829 – business use of your home form (totals flow into the Schedule C)

Again, I cannot emphasize the value of having a tax accountant calculate your return. In this example, where you would have $2000 of expenses to deduct, it would result in tax savings of ~$700.  The cost of accountant is worth he or she saving you the $700.