Home Office Deduction: How does it help you save?
The home office deduction is a fantastic tax tool. It’s a benefit for anybody who’s in business.
If you don’t have it, you want it. It could save you thousands of dollars in taxes over the course of the year.
How much is it worth? It depends on several things. It creates tax savings in two ways.
Tax Savings With a Home Office Deduction #1
It allows you to deduct a percentage of your normal home operating expenses such as:
- Rent or mortgage
Depending on what proportion of the home is used, you can deduct a part of those costs.
Tax Savings With a Home Office Deduction #2
The other way is more lucrative than your normal expenses. It establishes a business presence in your home.
Anytime you drive out to a client or another office, you can take a tax deduction for the miles you’re driving. You’re reducing your taxable income when you’re able to deduct those expenses.
Tax Strategy Rules
Of course, with every tax deduction or any tax strategy, there are rules that you have to pay attention to. And this is no exception. The IRS has certain requirements that they want you to meet for the home office tax deduction. And to qualify, you have to show several things.
One, you have to use your home only for your business in the area where you have your home office. You can’t use it for any personal purposes, and you can’t use it for other businesses that don’t meet the exclusion.
So you have to use it only for your business, and you have to do it often. It has to be a weekly occasion. They don’t define it but it has to be regular, about five to 10 hours a week of activity in your home office. You have to be performing those administrative and management functions.
You want to be doing things like:
- Doing your client billing
- Keeping your books and records
- Writing any memos required or reports
What Not To Do
It has to be those administrative functions. You don’t want to do your administrative functions in your home office. You want to have the exclusive use test B for your home office. And you have to have no other fixed location where you do those administrative functions.
What are the dangers if you don’t do that? If you do too much administrative work in another place, you’ll lose that tax deduction. Personal or non-business activities in your home office could lose you that deduction. You can do other work there.
If you have marketing or other work that you need to do, it doesn’t prevent you from doing them. You need to be doing those administrative functions in your home office.
So, again, take advantage of home offices. A home office deduction could save you thousands of dollars in taxes over the course of a year.