If you are an online entrepreneur, there’s a good chance you have a home office. Just like with any office, a home office has expenses and those expenses, depending on the situation, may be tax deductible.
In order to be eligible for a home office deduction, the dwelling must meet one of the following criteria:
- It is a primary place of business
- It is a place of business to meet clients/customers/patients in a normal course of business
- A separate structure from the home itself
In all cases, the home office has to be regularly and exclusively used to conduct business. If you meet any one of those requirements, then you have 2 ways of deduction: Actual Expense Method and Simplified Method.
With the Actual Expense Method, direct expenses for the home office portion are fully deductible. That would be things like paint, carpet, furniture, etc. Indirect expenses, such as property taxes, rent, utilities, are deductible on a pro rata allocation. This would be based on a square footage ratio.
With the Simplified Method, you can deduct $5 per square foot up to 300 square feet. No depreciation can be deducted and Interest, property taxes, and casualty losses are deductible on Schedule A.
You can change which method is used yearly to maximize tax savings.
When taking deductions in your business, it is critical to have precise documentation. Keep detailed receipts, contracts, and any other proof of the costs. If you end up in a situation where you have to explain your case to the IRS, you will want every piece of documentation to back up your case.
CPA On Fire is an online accounting firm for online entrepreneurs. We have extensive knowledge on working with entrepreneurs who have businesses in the ecommerce, coaching, and other online business communities. If you are looking for a highly qualified and experienced accountant, schedule a free Financial Review with us. We will show you what we can do for your business to help you grow exponentially.