The Coronavirus pandemic changed how we live in many ways. It also changed how we work. Many Americans shifted their workplace to their home because of the pandemic. While some did it only temporarily, others have continued working from home. If you are one of the many now running a business from home, what are the tax advantages (or disadvantages)?
If you run a business, you incur expenses that you want to ultimately deduct from your taxes. If you have a home business, what are the rules for deducting expenses? An experienced tax professional can provide valuable advice in this situation to help ensure that you maximize your situation and realize all the possible tax advantages available for running a home business.
The Advantages of Working from Home
If you use part of your home for business, you can deduct expenses for the business use of your home, which will help reduce the cost of your home living expenses. However, you must meet two tests to qualify to deduct expenses when using your home for some business.
In most cases, federal tax law does not permit you to deduct personal, living, or family expenses. However, if you realize an expense for something used for both personal and business purposes, you can divide the total cost between both purposes and deduct the business portion of the use.
The Exclusive Use Test
To claim expenses for the business use of your home, you must meet both of the following tests.
- The business part of your home must be used exclusively and regularly for your trade or business.
- The business portion of your home must be:
- Your principal place of business;
- A location where you meet clients or customers in the normal course of your trade or business; or
- A separate structure unattached to your home used in connection with your trade or business.
Your home office qualifies as a principal place of business if you meet the following requirements.
- You use the office exclusively and regularly for administrative or management activities.
- You have no other fixed location where you conduct substantial administrative or management activities.
How do I Determine If My Home Is My Principal Place of Business?
If work from home but still additionally work at another location, you must determine your principal place of business. You can do this based on the following factors.
- The relative importance of the activities performed at each location where you work.
- If the relative importance factor does not determine your principal place of business, analyze the time spent at each location.
What Can You Deduct If You Work at Home?
If you work from home, it is possible to deduct expenses such as utilities, insurance, depreciation, mortgage interest, and maintenance/repairs. You are not allowed to take any deductions for expenses incurred related to activities that are not engaged in for profit.
The following are some expenses that you may deduct if you work from home:
- Rent expenses
- Supplies and materials
- Cost of goods sold (storage, overhead, direct labor costs, and raw materials costs)
- Employee wages
- Interest
- Professional services
- Business development
- Marketing
- Business use of your motor vehicles
- Travel expenses
- Business taxes
- Business insurance
- Retirement plans
Like any expense for an activity related to a home business, usage for any business deduction is calculated using the percentage of use for business purposes compared to personal use.
The Disadvantages of Working from Home
The disadvantages of working from home are generally related to the oversight of the entire process to ensure that you are complying with all federal tax rules and regulations appliable to working from home, which is necessary to realize the tax advantages of working from home. Also, by working from home, you are reducing space available in your home for everyday living.
Working from home can be a slippery slope to travel for any business owner. In this situation, it makes sense to talk to a qualified tax professional and learn more so that you realize all possible related tax benefits.
Talk to a Qualified Tax Professional
If you live in New York or the Tri-State area and have any questions about any tax-related issue, call 212-490-0704 today for a FREE consultation. You can also learn more online here – THE TAX EXPERTS.
