As a small business owner, you may be using part of your house as a home office. You may be eligible to claim part of your home as a home office if certain requirements are met.
A home office qualifies as a principal place of business if most of the income-earning activities occur at your home office. In addition, a home office can be considered as a principal place of business if the taxpayer’s administrative or management activities are conducted there.
One of the most popular methods for taking this deduction is called the safe harbor deduction and the deduction cannot exceed $1,500.
The safe-harbor method allows an eligible taxpayer to claim a home office deduction of $5 per square foot of space that is exclusively used for business use i.e limited to 300 square foot. Therefore, according to this method, the maximum allowable is $1,500.
This method called the safe harbor method is an alternate way of calculating home office deduction as compared to deducting actual expenses for your home.
Business deductions that may not be related to the home office usage : If you use the safe-harbor method for the tax year, you are still eligible to deduct any allowable business expenses that are unrelated to your business office EG: Office supplies, marketing and advertising costs etc.
Opting out of the safe-harbor method : This method is not for everyone. Few businesses may have substantially higher home office deductions than others. Therefore, you need to consult a tax professional who can help you decide safe-harbor vs actual expenses method.
The Internal Revenue Service (IRS) provides you an option to change the method from year to year. However, once you make the election it cannot be changed for that particular year. As a taxpayer, you are allowed to change the election from the safe-harbor method to the actual expenses method and vice versa.
Employees who use the home office : If you are an employee using part of your home for office work, you may be ineligible if your employer is reimbursing you for these expenses. Please check with a tax professional for further assistance on this matter.