How to Take the Home Office Deduction Without Getting in Trouble With the IRS

Guest blog by Emma Grace Brown

According to estimates, there are 15 million home-based businesses in the United States. Some small business owners shy away from taking home office deductions because they fear it will trigger an audit by the IRS. However, you should take the deduction if you qualify for it.

Qualifying for the Home Office Deduction

There are a few conditions that business owners must meet to qualify for the home office deduction. First, the office must be located in the home you permanently live in or in a freestanding structure on the property of that home. Temporary housing, such as a hotel, doesn't count. Second, the space you are claiming as your home office must be used only for your business. If you are working from your dining room table that you also use for dining, then you can't claim that room for the home office deduction. Finally, while your home office doesn't have to be the only place you conduct business, it must be the primary place.

Calculating Your Deduction

You can calculate your deduction using either the simplified option or the regular option. With the simplified option, you get a set write-off based on the square footage of your home office, regardless of what your actual expenses are. The regular method compares your actual expenses for items such as mortgage interest, maintenance, taxes, repairs, utilities, office furniture, and insurance to your overall residential expenses. In general, the regular method is more likely to result in a larger deduction for business owners who use a larger portion of their home for business use, and the simplified option may work better for people with home offices that are 300 square feet or smaller.

Avoiding Potential IRS Trip Ups

Don't let the fear that you might be audited stop you from taking deductions you are entitled to but do take precautions. Keep detailed records of any business expense you plan to take a deduction for. If you purchased any updates for your home office, such as a new workstation, computer, or copy machine, keep the receipts. Be aware that using the actual-expenses deduction for your home office could affect your ability to avoid paying capital gains tax if you sell your home.

Getting Professional Help

If the thought of facing tax penalties or an audit keeps you up at night, get some professional help. Tax preparation software or a certified public accountant can help you avoid common mistakes and explain the pros and cons of various deductions.

Formalizing Your Business Structure

If you are just getting your business started, make sure you cross off all the startup tasks before doing your taxes. The business structure you choose can affect the taxes you owe, so it is a good idea to formalize the structure before you file. You can make this process easier and faster by using an online service that will also help you with any compliance issues — reach out to the Zen Business contact number to start. Additionally, you can write off any fees you pay as startup costs.

Navigating the process of doing your taxes for your small business can be intimidating. Using the right tools and educating yourself about the process can help you avoid overpaying taxes because you are afraid to take deductions you are entitled to.

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