One way to do this is to prepare a diagram of your workspace, with accurate measurements, in case you are required to submit this information to substantiate your deduction, which uses the square footage of your workspace in its calculation. In addition to the office space itself, the expenses that you can deduct for your home office include the business percentage of deductible mortgage interest , home depreciation , utilities, homeowners insurance , and repairs that you pay during the year.
Some of these deductions, such as mortgage interest and home depreciation, apply only to those who own rather than rent their home office space. The standard method requires you to calculate your actual home office expenses and keep detailed records in the event of an audit.
The simplified option lets you multiply an IRS-determined rate by your home office square footage. To use the simplified option, your home office must not be larger than square feet, and you cannot deduct depreciation or home-related itemized deductions.
Regardless of whether you claim the home office deduction, you can deduct the business portion of your phone, fax, and Internet expenses.
The key is to deduct only the expenses directly related to your business. For example, you could deduct the Internet-related costs of running a website for your business. A meal is a tax-deductible business expense when you are traveling for business, at a business conference, or entertaining a client.
Unfortunately, this means that the desk lunch is not tax deductible. This provision is effective for expenses incurred after Dec. The lunch that you eat alone at your desk is not tax deductible. Additionally, before the TCJA, meals and entertainment expenses were considered together. To qualify as a tax deduction, business travel must last longer than an ordinary workday, require you to get sleep or rest, and take place away from the general area of your tax home usually, outside the city where your business is located.
Further, to be considered a business trip, you should have a specific business purpose planned before you leave home and you must actually engage in business activity—such as finding new customers, meeting with clients, or learning new skills directly related to your business—while you are on the road. Keep complete and accurate records and receipts for your business travel expenses and activities, as this deduction often draws scrutiny from the IRS.
Deductible travel expenses include the cost of transportation to and from your destination such as plane fare , the cost of transportation at your destination such as car rental, Uber fare, or subway tickets , lodging, and meals. If your trip combines business with pleasure, then things get a lot more complicated; in a nutshell, you can only deduct the expenses related to the business portion of your trip. For example, if your spouse who does not work for you as an employee joins you on a business trip, then you can only deduct the portion of lodging and transportation costs that would have been incurred if you had traveled alone.
When you use your car for business, your expenses for those drives are tax deductible. You can calculate your deduction using either the standard mileage rate determined annually by the IRS or your actual expenses. The standard mileage rates are Using the standard mileage rate is easiest because it requires minimal record keeping and calculation. Just write down the business miles that you drive and the dates when you drive them.
Then, multiply your total annual business miles by the standard mileage rate. This amount is your deductible expense. To use the actual expense method, you must calculate the percentage of driving that you did for business all year as well as the total cost of operating your car, including depreciation, gas, oil changes, registration fees, repairs, and car insurance.
If you want to use the standard mileage rate on a car that you own, then you need to use that method in the first year when the car is available for use in your business. In later years, you can choose to use either the standard mileage rate or switch to actual expenses.
If you are leasing a vehicle and wish to use the standard mileage rate, you must use the standard mileage rate in each year of the lease period. As with the home office deduction, it may be worth calculating your deduction both ways so that you can claim whichever is the larger amount.
Interest on a business loan from a bank is a tax-deductible business expense. You will need to track the disbursement of funds for various uses if the entire loan is not used for business-related activities. Credit card interest is not tax deductible when you incur the interest for personal purchases, but when the interest applies to business purchases, it is tax deductible.
A tax deduction only gives you back some of your money, not all of it, so try to avoid borrowing money. For some businesses, though, borrowing may be the only way to get up and running, to sustain the business through slow periods, or to ramp up for busy periods. The cost of specialized magazines, journals, and books directly related to your business is tax deductible as supplies and materials.
A daily newspaper, for example, would not be specific enough to be considered a business expense. Any education expenses that you want to deduct must be related to maintaining or improving your skills for your existing business.
Do you pay premiums for any type of insurance to protect your business , such as fire insurance, credit insurance, car insurance on a business vehicle, or business liability insurance?
If so, you can deduct your premiums. The business insurance tax deduction can help ease that dislike. If you provide day care services for children, elderly 65 or older or handicapped individuals in that part of the house, you can probably still claim business deductions, as long as you have a license, certification or approval as a day care center under state law, according to the IRS.
The other exception is if you use the office for storage of inventory or product samples you sell in your business. That means you use the space exclusively and regularly for administrative or management activities, such as billing customers, setting up appointments and keeping books and records, according to the IRS.
You can determine the value of your deduction the easy way or the hard way. Instead, the square footage of your space is multiplied by a prescribed rate. The regular, more difficult method values your home office by measuring actual expenditures against your overall residence expenses.
You can deduct mortgage interest, taxes, maintenance and repairs, insurance, utilities and other expenses. You can use Form to figure out the expenses you can deduct. If you use the actual-expenses method, you can deduct direct expenses — such as painting or repairs solely in the home office — in full. Indirect expenses — mortgage interest, insurance, home utilities, real estate taxes, general home repairs — are deductible based on the percentage of your home used for business.
The standard method has some calculation, allocation, and substantiation requirements that are complex and burdensome for small business owners. This new simplified option can significantly reduce the burden of recordkeeping by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses.
Taxpayers using the regular method required for tax years and prior , instead of the optional method, must determine the actual expenses of their home office. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Generally, when using the regular method, deductions for a home office are based on the percentage of your home devoted to business use.
So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.
Regardless of the method chosen, there are two basic requirements for your home to qualify as a deduction:. You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room. You must show that you use your home as your principal place of business. If you choose the simplified method, you would complete the Simplified Method Worksheet. The worksheet provides guidance to help you figure your allowable deduction to claim on the tax return.
This process is a little more involved. You want to make certain you do not make common mistakes when claiming the credit, such as claiming the credit if you are an employee and deducting an area in your home that is not used solely for the purpose of your business. If you do make a mistake, you will need to amend your tax return with the IRS. Susan Allen, a certified public accountant, and senior manager for tax practice and ethics at the American Institute of CPAs AICPA says while employees are not able to claim the deduction, they should consider asking their employer for reimbursement for expenses paid for related to their home office.
Allen adds this allows the employer the ability to deduct the reimbursement as business expenses, which may further incentivize them to recompense you. Allen says taxpayers may want to use the simplified option, which is an easier option. But like all tax matters, Allen says you should consider consulting with a CPA for all of your tax and financial needs. Check out more of her work at kemberley. Select Region. United States. United Kingdom. Kemberley Washington.
Forbes Advisor Staff. Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations. Here is what you need to know about deducting your home office expenses. Compare the best tax software for the self-employed.
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