Take All Your Home Based Business Tax Deductions

Home based business tax deductions is a hot topic, particularly after many employees moved to a work-at-home environment due to the COVID pandemic. Freelancing is also growing dramatically in today’s economy, and much of that work is done in the home environment. If you do conduct some or all your business in your home, you could enjoy a list of home based business tax deductionsⁱ to keep more of your money.

Qualifying for Home Based Business Tax Deductions

Before you can calculate available deductions, you must understand the ways in which you can qualify a portion of your home for business use. Some combination of these conditions should qualify a space as a home based business.

• Exclusive use - You can qualify under the exclusive use test if you use a specific area of your home only for your trade or business. It can be a room or any designated space, and it does not need to be divided by a partition. You cannot qualify if you use a space just for inventory storage.
• Regular use – You cannot just use a designated area occasionally. It must be used on a regular basis.
• Trade or business use – The space you use must be for the operation of a trade or business. As an example of what will not qualify would be a space where you do research related to your own investments and you are not a broker or dealer.
• Principal place of business – You can have more than one place where you conduct your business. For your home to qualify for deductions you must use it as your principal place of business. Things that bear on this designation include:
  • The relative importance of the activities at home versus other locations.
  • The amount of time spent at your home location versus others.
• Meeting patients, clients, or customers – Even if you have another location where you also meet with patients, clients, or customers, you can still qualify a space in your home if you physically meet with them there and your use of the home is substantial to the conduct of your business.
• Separate structure – If you use a separate free-standing structure, studio, garage, or workshop exclusively for your business, you can qualify for home based business tax deductions.

Calculating Home Based Business Tax Deductions

You will probably want to consult with an accountant or tax professional for help with this, as it can get complicated. There are two ways in which you can calculate home based business tax deductions.

• Using actual expenses – First you must figure the percentage of your home’s space you use exclusively for business. You apply that percentage to expenses for your deductions, and those expenses can include (again it is complicated, so get help):
  • Real estate taxes
  • Home mortgage interest
  • Mortgage insurance premiums
  • Insurance costs
  • Rent
  • Repairs
  • Security system
  • Utilities
  • Telephone and internet
  • Depreciation of the home
• Using the Simplified Method – Considering the fact that several pages of the IRS Publication 587 are used to explain this “simplified” method, you will want some tax expert help. However, in general you can apply $5 multiplied by the allowable area for your qualified home based business tax deductions.

The important thing to know is that meeting the qualifications for home based business tax deductions can save you significant money over the life of your business.

i Publication 587, Business Use of Your Home – IRS.gov