The Home Office Deduction

Avoiding unnecessary tax liability involves understanding many of the business-related deductions the IRS offers entrepreneurs. If you run your business from your home, you may be entitled to a home office deduction on the square footage of your home being used exclusively for your business. The

“exclusivity” test is taken very seriously by IRS auditors. The section of your   home that you claim is used for business must be partitioned in some way and personal-use either by you or other members of your family must be nominal (according to IRS, allowing your son to do his homework in your home office is enough to disqualify the deduction).

The second requirement is that the home office must be used as a principal place of business. The office must be used regularly (and exclusively for business) or it must be an area that is used primarily for meeting with clients. This does not mean, however that if you use an outside office from time-to-time you are disqualified from the home office deduction. So long as the office is used to complete substantial administrative or managerial tasks for the business, the second requirement will be met.

The ultimate payoff is that a number of direct and indirect expenses that would otherwise be personal, nondeductible expenses can be converted to business write-offs and consequently lower your overall tax bill (this includes the cost of phones or internet service, the cost of repairing the office, a certain percentage of utilities, insurance, taxes and much more). A well-drafted Home Office Lease between your corporation or LLC and yourself would be a great place to start.

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