Tax deductions for working from home

Let's talk now about the tax facilities that come with running a business from home. There are a large number of deductible expenses in a business, but when it is based in your own home, a portion of your home taxes may also be deductible because it is used for business purposes. Also property and profit taxes may be deductible in federal taxation.

If we look at the case of the United States, we will see that the Internal Revenue Service or IRS defines a home as a space where you can eat and sleep. This definition includes houses, apartments, condominiums, mobile homes, bars or tents where you can cook and sleep. In these cases you do not have to own these spaces, you can rent them. Both owners and renters are eligible for tax deductions.

Home-Based Business Tax Deduction Requirements

The IRS has two requirements for business owners to qualify for home-based business tax deductions. First, they must ensure that at least a portion of the home is being used exclusively for business purposes on a regular basis.

As a second requirement, you must be able to demonstrate that you perform any of the following actions in the home: that you meet with patients or clients inside the home or use a separate section of the home for your professional activities.

First Requirement

Let's talk then about the first requirement and the part that mentions about exclusivity. This states that you must use a section of the home exclusively for business purposes. This means that tax deductions can only be attributed to the part of the home that you use only for business.

For example, let's say you are a life coach and you use dissimilar diets as part of your programs, to sell to your clients. And to this end, you use the kitchen of the house for the creation of these recipes, which you would then use to cook meals for the inhabitants of the house. In this case then, the kitchen would not be considered as an exclusive space for business and would not get tax deductions.

In case you use an office inside the house only for business purposes, it would meet the requirement of business use exclusivity. You should keep in mind that, if the space you use for business purposes has a bed that is sometimes used for sleeping, or for storing, for example, the children's toys, it would not meet the exclusivity criteria.

There are two exceptions to this requirement:

• The first is if it functions as a storage room for business products or materials.

• The second is if it also functions as a qualified day care center for the children.

In these two scenarios, you do not need to provide evidence of exclusive business use of the space. This means that if, for example, you use a closet or display case in your home to store business materials or samples and you also store personal items, you are still entitled to tax deductions. Also if you use the room as a nursery and for personal activities.

Example: Let's look at an example that may clarify the above:

• Matt is a health and life coach who runs his business from his home, where he makes instructional videos of various cooking recipes and exercise routines. In general most of his business happens online. Still, many of his clients prefer the videos in DVD or Blu-Ray format.
• For this, Matt, apart from recording the videos and posting them online, converts them to DVD and Blu-Ray format and stores them in a closet inside his home, as he has no other space outside his home. In this case, Matt can claim a tax deduction based on his business for that closet even though he also stores personal items inside it.

I hope this example gives you a better idea of the meaning of exclusivity for business purposes.

Second requirement

Let's now talk about the second requirement to qualify for tax deductions from home-based entrepreneurship. This one states that you must use your home as the principal place of business. What this means is that, in addition to meeting the requirement of exclusivity and regular use of the space for business purposes, your home must be the primary location from which you run the business.

In this case, running the business from the home would include administrative activities, even if you have other space outside the home where you also conduct your business. The requirement is quite clear, as long as you use your home office for bookkeeping, bookkeeping, maintaining and updating the client database or other activity related to the administration of the business, it will be considered for tax deductions.

It is then necessary for the claiming of these deductions that you document in different ways how you use your home as an office. To do this you should take photographs of the office inside the home where a desk with a computer and other materials you use for business purposes are visible. In addition to this, I advise you to make a diagram of the house that clearly shows the space or spaces that you use as office or storage for the business. You should also keep a record that delineates the business meetings you hold and their schedules.

By keeping all this process properly documented, it will be much easier when it comes time to file taxes or for your accountant, in case you use one for your business. With this documentation the accountant will be able to easily calculate the tax deductions you can receive.

How to calculate tax deductions?

This process can be a bit complex, so it is always advisable that you seek professional advice in order to avoid mistakes. But, like any self-respecting entrepreneur, you should know how to make them. If you want to know how to make these deductions and what measurements to make, you should know that there are two main ways to calculate them. The first is the old or standard method and the second is the new or simplified method.

When you have already determined that your home business qualifies for the tax deduction, you must then calculate the exact value that you can actually deduct, since only expenses that have to do with the business can be deducted.

Old or standard method

This method is used to calculate the percentage of your home that is used for business and can be calculated in two ways. The square footage method and the number of rooms method.

Square footage method. This simply divides the square footage used for business by the total square footage of the home. This means that, for example, in an office of 50 square meters inside a house of 200 square meters, the space for the business would amount to a total of 25% of the house. It is relatively simple to calculate this to delimit the percentage of the house that is being used as an office.

Method by number of rooms. This method is also relatively simple to carry out, although it is not feasible for all types of houses. If, for example, your house has 5 rooms and you use one of them as an office, you could approximate that you use 20% of the house for business purposes. In this model the house would represent 100% and each of the 5 rooms would represent 20% of the house.

Once you have finished calculating the percentage of the business that occupies your home with any of the above methodologies, you should then focus on delimiting all the expenses you are going