Home business owners may not always be aware of the tax write-offs they can take. This includes write-offs on any office expenses or updates, so long as your home office meets certain basic requirements. Ideally, you will work with your accountant on figuring out which deductions you can take and how to go about it based on your business structure. But it’s important to have a general idea of how these deductions work, so you can keep accurate records and go into tax time well informed.
The following tips are general information only. They are not legal or accounting advice. Consult your CPA for tax information that applies to your unique situation.
Forming Your Business
For your home office updates to qualify for small business write-ups, you need to be a business owner, not an employee. If you have not yet formed your business as a legal entity, then you should move ahead with this.
The structure you choose will be up to you, but for many home business owners, the limited liability company (LLC) structure is preferable. As an LLC, you have access to those home office tax deductions, as well as other write-offs, but you’ll have less paperwork compared to as an S-Corp and more protection than a sole proprietor. LLC Washington state registration is not difficult, and there are even online services that can handle it for you. As a bonus, you’ll likely qualify to write off the expenses of formation.
Criteria for Qualification: Regular and Exclusive Use
To take these deductions legally, your home office will need to qualify as a business space. There are several ways to meet this criterion. If you use the space regularly and exclusively as a place of business, you can write off deductions. What does this mean? If you conduct most of your business and income-earning activity in a work area, it counts as a home office space, and you can take deductions on upgrades done to it.
You can also apply this rule if you perform business-related tasks such as inventory or bookkeeping and your home office is the only space where this work is done — versus if you were bringing home extra work from an external office. You can also take the deductions if you use your home office space to meet with clients or customers. These criteria apply whether your office is in a section of your home or is a separate, free-standing structure.
Tax Deductions for Direct Expenses Related to Your Office
Any repairs or updates you do to the home office space itself are likely to be eligible for write-offs. This could include improvements such as window upgrades or flooring and carpet replacement, or a new paint job. It could also entail purchases and upgrades to your office space, such as the acquisition of a new computer or printer.
Indirect Expenses and Tax Deductions
You or your accountant can also assess which percentage of overall home costs goes toward maintaining your business space. These expenses include utilities, rent, mortgage and insurance. If you have had repairs done to your home, you may also be able to write off a percentage of the costs as business expenses.
Since all this can be difficult to keep track of, there is another, simplified option: Simply deduct $5 from your overall expenses for every square foot of space used for your home business. You can deduct up to $1,500 using this method.
Work with your tax preparer to figure out which option will get you more savings. Remember, if you had repairs done to a part of the house that is nonbusiness related, this does not qualify for a deduction.
What About Cell Phone Use?
Since you use your mobile phone in places other than your home office, does this mean you can’t claim any deductions on your phone bill? In this case, you can deduct a percentage from your bill, correlating with the percentage of phone use that is business-related.
It’s a good idea to ask for an itemized phone bill, so you can be sure about the actual numbers. Incidentally, even if you’re not a business owner but are using your cell phone for work, you may be able to claim this as a reimbursed business expense — but talk to your accountant first.
Can You Write off Deductions on Office Furnishings?
It’s not just office supplies and technological devices that count when it comes to claiming deductions. You may also be able to write off the expenses of office furniture, including chairs, desks, cubicles and storage space. You may even be able to write off artwork or décor purchased exclusively for your home office.
Other Small-Business Deductions
Besides the expenditures on office supplies, upgrades and utilities, there are many other areas where you may be able to claim deductions on your business taxes. These include health insurance and retirement plans. You may also be able to deduct some education costs if they pertain directly to skills or knowledge necessary to running your business. Auto repair and travel expenses can also be deducted in certain circumstances. And you may even be able to get some write-offs on entertainment and gifts if they are for clients, customers, or employees.
Getting your home business expenses calculated accurately may be a little extra work, but it’s usually worth it for the tax savings. Be informed on how to take these write-offs and work with your accountant so you don’t make mistakes or miss out on savings for your company.