Home office deduction for self employed

Do you work for yourself and are the type of person who likes to work in the comfort of your own home and be your own boss? The Home Office deduction is a tax deduction that may save some tax dollars.

Apart from stress-free and hassle-free travel to your workplace, there is also a tax deduction in addition to the usual business expenses that people typically use on their tax return. Costs for repairing your office and writing off office furniture are legal tax deductions that can benefit you. Another aspect of the home office deduction is to be able to allocate home operating expenses such as room costs, insurance, depreciation, mortgage rates, property taxes, etc. and use them as a deduction. The expenses are distributed as a percentage. The percentage is calculated by taking the square footage of the office and dividing it by the total area of ​​the home. If the home office qualifies as the “largest place of business”, travel costs from the home office to other workplaces are deductible.

In order for the home office to qualify for the deduction, it must pass one of the following three tests:

1. Structure test. Costs are deductible when the structure is not attached to the employee’s home, when the structure is used exclusively and regularly for the company.

2. Office location is the place to meet clients, customers or patients. The office is regularly used to meet clients, customers or patients. Clients, clients or patients should visit the home office. Making phone calls to clients, customers or patients does not meet this requirement.

3. Main placement test. An independent trader can take the deduction in the home office when the home is used exclusively and regularly as the primary place of business. To meet this requirement, the main place of business is where the self-employed spend more than half their time. Administrative and / or management tasks performed at home qualify the home for the “most important placement test.”

When the office falls under one of the three categories mentioned above, the home office must pass one more test. The area must be used exclusively and regularly for work.

For example, a self-employed worker works in an extra bedroom with a desk, home computer and a treadmill inside it. The self also uses the treadmill to exercise; this is personal use of the home office and omits the exclusive use requirement. There is an exception to the exclusive and regular testing, costs associated with storing products and samples, although space is not for exclusive use, the expenses may still be deductible.

Home sales

When someone sells their primary place of residence, they typically qualify for “Home Sales Tax Exclusion”. This exclusion allows homeowners to exclude part or all of the gain from their income. When a home that contains a home office is sold for a profit, the profits that correspond to the depreciation previously required for the home deduction are not allowed as part of the “Exclusion of home sales tax.” This is called recovery depreciation.

Sometimes, not all expenses are deductible in the current year. There are restrictions on the amount of deductions that are considered deductible. Interest on home loans and property taxes is always deductible. The restrictions in the deduction apply to operating expenses such as utilities, insurance and depreciation. The amount of deductible operating expenses is limited to the income of the company. Non-deductible operating expenses are carried over to the next year.

We hope this article was helpful. This article is only an example for illustrative purposes and is intended for a general resource, not a recommendation.