If you’re a small business owner and you work from home, you may qualify for a home office deduction! This is a big perk to help lower your taxes.

You can take this deduction if you use a portion of your home exclusively, and on a regular basis, for any of the following:

• As your main place of business.
• Where you meet clients or customers.
• A place where you store inventory or samples. This place must be the sole, fixed location of your business.
• Under certain circumstances, the structure where you provide daycare services.

If you meet the above requirements for a home office, then you are allowed to deduct a portion of your home expenses, including:

• Real estate taxes
• Mortgage interest
• Rent
• Utilities
• Insurance
• Repairs and Maintenance

There are two options for figuring and claiming the home office deduction:

Regular method

This method requires dividing the above expenses of operating your home between personal and business use. To do so you take your home office square footage and divide it by your total home square footage. You then take that percentage of your home expenses as a deduction.

Example – Molly has a home office that is 100 square feet that she exclusively uses for her marketing business. She rents her home, which is 1,200 square feet. Her total annual rent, renters insurance, and utilities cost $15,000. Her business use percentage is 8.3% (100 divided by 1,200), so her home office deduction is $1,250 ($15,000 times 8.3%).

Simplified method

Not really up to keeping track of all of your home expenses throughout the year? Problem solved. The simplified method reduces the paperwork and record keeping for entrepreneurs. The simplified method has a set rate of $5 a square foot for business use of the home. The maximum deduction allowed is based on 300 square feet.

Example – If Molly used the simplified method, she would take her office square footage (100) and multiple it by $5, so her deduction would be $500.

Important Reminders

It’s important to remember that you don’t want to pay your home expenses through your business. You want to pay for these expenses from your personal account and track them separately. You will take this deduction on your Schedule C, which is a form in your personal federal income tax return where you disclose your business income and expenses.

It’s also a good reminder to make sure you keep documentation of your home expenses to be able to appropriately take this deduction.

And if your business has elected to be federally taxed as an S-Corporation, then this deduction gets a little more tricky. You have to establish an “Accountable Plan” where you (as the employee) are reimbursed for your home office expenses.

Moral of the story – if you are slaying business as an S-Corp then you should be working with a CPA to help you with these things 😉

Candace is the founder of NewWay Accounting and is a CPA who specializes in working with fellow entrepreneurs. She strives to take the fear and anxiety out of taxes and help empower small business owners to feel more confident and in control of their finances.