If you set up your business’s office inside your home, how will you go about deducting the costs of that office?
Since not all of your home expenses are for the business, then some sort of allotment must be made in order to accurately reflect business expenses. A certifiable “home office” that is used “exclusively and regularly as your principal place of business” or “for the storage of inventory or product samples” can be a tough goal to reach. You can check irs.gov/smallbiz and Publication 587 at http://www.irs.gov/publications/p587/ar02.html#d0e239 for further guidance.
Basically, if you can reach the standard, then you calculate the percentage of the home office/storage area to your total house square footage. This percentage is then applied to the various expenses of running your house that would normally be considered by the IRS as personal.
For example, if your home’s total living space (excluding the garage) is 1980 square feet, and, if you have a 12’x15’ “home office” (180sq ft) plus the attached closet of 3’x8’ (24sq ft) that equals a total of 204sq ft for your Home Office. This makes your business percentage 204/1980 or 10.3%. Therefore, 10.3% of household expenses may be business related—i.e., electricity, natural gas, water, sewage, rent or mortgage interest, home repairs, homeowners insurance, real estate taxes, etc.
Now, how can this be tied to your “envelopes of expenses?” Easy: label your envelope “Home Office.” On the outside record your calculation for percentage of office use. Inside put your utility bills after you pay them, your receipts for paid whole house-type repairs/maintenance, your notice of real estate taxes due (after you pay), your bill for your homeowners insurance (after you pay), your annual notice of mortgage interest paid, you get the idea.
If your “Home Office” is actually in a separate building or shed or you completely convert an unattached garage, but your utilities, etc are all inclusive, then you still need to calculate percentage of use. The best part of “shed working” is that there is a much lower standard for calling it your office (see the IRS web site). This is a good thing.
Some seemingly home-office-type items exist. These items may be totally or partially deductible on a different percentage from that allotted to your home-bound office. These items will require some special attention and their own envelopes.
Phone: You cannot, under any circumstances, consider the first land line into your home as a business expense—even if you never had a land line before. The IRS simply will not stand for it and they have never lost a Tax Court case on this issue. However, any long distance charges incurred for business purposes are business expenses. As are any special features you might have for strictly business purposes.
I have caller ID, call forwarding and remote call forwarding as the only special features. I signed up for them because of my business. I consider them business expenses along with their respective taxes each month.
Additionally, a second line to your home-office-shed or into the house for fax or internet connection or as a phone in your home office can be fully deductible.
Cell: If you carry a cell phone that you got for business use, or if you converted your personal cell to business use and you quit text-ing your bff, the associated costs are business expenses. If each month’s cell phone bill itemizes calls, you should mark any that are not business related even if your plan-cost is all-inclusive. Do this each month when the bill arrives. It will be much easier to do the closer to the event you do it. Besides the IRS loves “contemporaneous” records.
Internet/wireless services: If you can honestly say you incur these expenses for your business, then they are deductible.
Cable TV service: Well, this sort of depends on what kind of business you are in. If you are a part time, semi-pro actor/actress who feels that viewing the excellent performances on TCM, HBO, etc., enhances your craft, you could deduct the charges for those, but not the basic cable service. I know a farmer who uses his cable service to access a commodities forecasting “channel,” this “channel” is deductible as ordinary and necessary to his business.
We have been talking about these items being deductible, but where? Since you are a sole-proprietor on the cash basis, deductions go on the Schedule C.
Now, this is a topic that has gone to Tax Court innumerable times. So, I’d be glad to try to answer any questions you have about home office deductions!
[Photo by CC Chapman on Flickr, used under Creative Commons License.]
This article is part of the Small Biz 100, a series of 100 practical hands-on posts for small business people and solo entrepreneurs, whether in a small town, the big city, or in between. If you have questions you’d like us to address in this series, leave a comment or send us an email at becky@smallbizsurvival.com. This is a community project!
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Thanks for writing this post. I just started a new venture and I have to store some stuff in my house. I knew about the deductions but this just reminded me to start keeping my records. I knew I was forgetting something. :)
Well, Ben, I am glad we could be of service. Also, we appreciate your kind words.
When it comes to deducting anything on your tax return, good RECORDS are the single most important thing to have.