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Tax Benefits and Obligations of Home-Based Businesses

Managing the relationship between home office and tax man

AUTHOR
Taylor Bradley, Esq.
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Many small business owners opt to use their homes for their businesses to save money. Yet, many worry that by running a home-based business, you lose out on business expense deductions that can help come tax season. Thankfully, the Internal Revenue Service (IRS) offers several home-based business tax deductions, too. If you're wondering where to start from, read about tax essentials for startups.

Below, we explore tax savings and obligations related to home-based businesses. We explain which spaces in your home qualify for a deduction. Then, we detail what expenses you may be able to deduct, how you figure out how much to deduct, and other ways to save money on your taxes.

Deductible Spaces of the Home

If you use your home for your business, you may be able to claim home-based business tax deductions related to a part of your home that you:

  • Exclusively, regularly use as your principal place of business

  • Exclusively, regularly use to meet with clients, customers, or patients

  • Regularly use to store inventory or samples

  • Dedicate to rental uses

  • Operate as a daycare facility

You may also claim a deduction related to business use of a separate, detached structure that you use regularly and exclusively in connection with your business.

Exclusive and Regular Use

If your business falls into one of the categories that use the word "exclusively," you cannot deduct expenses for mixed-business-and-personal-use spaces or equipment. In other words, you must use the space only for business purposes, but the space need not be separate.

Principal Place of Business

If you only complete your work in your home, it is likely your principal place of business. If you complete work in more than one place, whether your home is your principal place of business depends on:

  • The relative importance of the activities you complete in each location

  • How much time you spend in each location

  • Whether you perform administrative or management activities in that or any other location

You may be able to use the same principal place of business for multiple businesses.

Meeting with Clients, Customers, or Patients

To deduct expenses for a space you use to meet with clients, customers, or patients, you must:

  • Physically meet there in the normal course of business

  • Such meetings must constitute a "substantial and integral" part of your operations

You can claim this expense even if the space is not your principal place of business.

Inventory and Storage Uses

When your business involves selling products for retail or wholesale, you may deduct home storage expenses if you:

  • Keep the inventory in your home for use in your business

  • Have no other fixed business locations

  • Regularly use the space for storage

Notably, this category is not subject to the exclusivity rules. You can use the space for personal and business purposes while still qualifying for a deduction, but it must be separately identifiable as storage space. If you're considering a side hustle but don't know what to opt for, here are side hustle ideas and how to start a side hustle of your own.

Rental Uses

You may be able to deduct expenses related to offering property for rent, even part-time rent. Although you may also use the space for personal uses, you may only deduct the portion of expenses you can attribute to the rental activities. Learn more about the tax benefits of an LLC for a rental property.

Daycare

If your business provides daycare services in your home, you may deduct expenses related to your daycare activities even if you use the same space for personal use. You must also be in good standing as a daycare facility under state law.

Separate, Detached Structures

You can deduct expenses for a separate, detached structure you use for your business, like:

  • Garages

  • Studios

  • Workshops

  • Barns

You must use the space exclusively for your business, but it does not have to be your principal place of business.

Home Office Tax Deductions

Home-based business tax deductions are business expense deductions at their core, meaning you can only deduct costs related to your business activities. You may be able to take home office tax deductions for a portion of your:

  • Property taxes

  • Mortgage interest

  • Rent

  • Utilities

  • Maintenance

  • Repairs

  • Insurance

You may also be able to deduct losses from acts of nature, disasters, or theft. Depending on the property, you may also be able to depreciate the space and take deductions over time. Here's a guide to choosing the right business structure for your new business idea.

Many small business owners opt to use their homes for their businesses to save money.

Following IRS Rules for Home Office Deduction Calculations

If your home business qualifies for a home office deduction, you need to determine how much you can deduct. To follow the IRS rules for the home office deduction, select one of two calculation methods: regular (actual expense) and simplified. While the regular method requires more detail and complex calculations, it allows you to carry over deductions related to depreciation, losses, and income limits to other years. The simplified method does not allow carryover.

Regular Method

When you use the regular calculation method, you use Form 8829 to calculate your deduction amount. That form allows you to provide detailed information about your business's income and expenses. Once you add up your costs, you determine the percentage to use to arrive at the appropriate home-based business expense deduction. Find out when your filing is due using this business filing deadline tool.

Simplified Method

Under the simplified method, you can deduct $5 per square foot of your home you use for business, up to 300 square feet. You can also itemize your deductions using Schedule A from Form 1040, the income tax form, instead of the business-specific schedules that you use with the regular method.

Other Tax Write-Offs for a Home Business

Along with home office deductions, you may take the following tax write-offs for a home business as business expense deductions:

  • Uncollectible debts

  • Operations and maintenance expenses for vehicles

  • Employee pay

  • Insurance

  • Interest

  • Legal and other professional fees

  • Certain retirement plans

  • Rental costs

  • Taxes

  • Travel and meal expenses

Businesses may qualify for various business credits at the federal level. Many states also offer business deductions and credits under their state-specific laws. Here are 7 home business ideas that double as tax write-offs.

Maximizing Your Home-Office Savings

The government offers several ways for small business owners to save on tax bills. Taking advantage of home-office and other business deductions and credits can help your business retain crucial funds. Maximizing your tax savings usually requires consultation with an accountant or a tax lawyer, who can identify opportunities for savings and help you claim your deductions and credits.

Disclaimer: Bizee and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

Resources:

  • IRS, Business tax credits, link.

  • IRS, Instructions for Form 8829 (2024), link.

  • IRS, Publication 334 (2024), Tax Guide for Small Business, link.

  • IRS, Publication 527 (2024), Residential Rental Property, link.

  • IRS, Publication 587 (2024), Business Use of Your Home, link.

  • IRS, Simplified option for home office deduction, link.

  • IRS, Topic no. 509, Business use of home, link.

  • IRS, Topic no. 515, Casualty, disaster, and theft losses, link.

  • IRS, Topic no. 704, Depreciation, link.

  • IRS, Publication 334 (2024), Tax Guide for Small Business, link

  • IRS, Business Tax Credits, link

Key Takeaways:


  • Home-based businesses can qualify for various tax deductions offered by the IRS.

  • To deduct home office expenses, a space must be used exclusively and regularly for business.

  • A home office can qualify as a principal place of business if most administrative or management tasks are performed there.

  • Meeting with clients, customers, or patients at home can qualify a space for deductions if meetings are a substantial part of operations.

  • Storage of inventory in a home can be deductible even if the space is used for both business and personal purposes.

  • Rental activities in a home can be partially deductible, but only for the portion directly related to business use.

  • Daycare businesses can deduct home-related expenses even if the space is used for both business and personal purposes.

  • Detached structures, such as garages and studios, can qualify for deductions if used exclusively for business.

  • Home office deductions can cover a percentage of property taxes, mortgage interest, rent, utilities, maintenance, and insurance.

  • The IRS allows two deduction calculation methods: regular (actual expenses) and simplified ($5 per square foot, up to 300 square feet).

  • Businesses may also deduct other expenses such as employee wages, legal fees, travel, insurance, and bad debts.

  • Consulting an accountant or tax lawyer can help maximize tax savings and ensure compliance with IRS rules.

Taylor Bradley, Esq.
Taylor Bradley, Esq.

Taylor Bradley, Esq., is a licensed attorney and writer with experience in the private and public sectors, including a highly coveted state supreme court clerkship. She is passionate about many areas of the law and enjoys helping people better understand their legal rights and responsibilities.

Taylor earned her B.A. in Political Science and History summa cum laude from Iowa State University and her J.D. with High Distinction from the University of Iowa College of Law. While there, Taylor spent her time working on articles for the Iowa Law Review and working with clients in the immigration and domestic violence legal clinics. After law school, Taylor clerked for the Iowa Supreme Court, where she spent two years learning about many different areas of the law and finding something fascinating in (almost) every one. She then practiced business immigration law before turning her focus to legal writing. Taylor loves her cats, music, exploring nature, and embracing her nerdy side by playing tabletop roleplaying games like Dungeons and Dragons.

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