Do you know if you run a business from your home, it can help you save money? During the Covid-19 pandemic, people moved from offices to homes, and home-based work proved to be easier, more flexible, and more cost-effective.
The home office is suitable for getting rid of business taxes (both direct expenses and indirect expenses), business tax deductions, home-related expenses, business vehicles, business purchases, business insurance, and office space. This article covers all the important things you need to know regarding different expenses allowed for home office deductions. The tax deduction is an effective way to minimize the actual tax paid for the owned property. If you keep a proper record of all the types of allowable business expenses for the home office, you do not have to worry if the ever IRS comes knocking at your door.
1. Proper Home office
A home office is any place designed to be used for business-related tasks. It can be called a home office if you have your apartment, a bungalow rented flat, or even a garage, storehouse, or a little shaded area in your garden. A home office should not be used for any other home-related tasks. It should only be assigned to business activity. Moreover, meeting your clients only in your home office is not mandatory, but you cannot use your home office for multitasking. According to Internal Revenue Service (IRS), your office does not qualify to be a home office if you let your children play in it or use it to sleep and enjoy family time.
2. Home Office Deduction for Business owners
According to IRS, if you are a business owner or an independent contractor, you can only apply for a home office deduction. You need to spare business space for business-related tasks at your home to avail this benefit. If you are working as an employee of any other business, you cannot avail of this offer.
3. Rent & Mortgage Deduction
Rent and mortgage deductions only apply to the portion of your house that you are using for business purposes. You cannot include all your living area to enjoy the tax deductions. IRS updated a special chart for home office deduction on their website. You can visit it to get the details of the exact deductions. Rent and mortgage are calculated in the same way. Divide the area used by your home business office with the total area of your house and then multiply it by the total rent paid annually.
4. Office Deduction Expense
After getting the exact calculations of the area assigned for a home-based business, you can claim the tax deductions on the utility bills, electricity consumption, mortgage, homeowner expenses, office expenses, and cleaning services used in the dedicated space for the home office.
5. Home Office Maintenance Expenses
If you want to repair a certain portion of your house, including your home office, you must deduct a certain amount from the tax covering your home business. On the contrary, you are eligible for a 100% tax deduction if you repair something within the home office boundaries.
6. Home Office Security Expenses
You may hire a guard or any other automated social security system to protect your home business area. You are exempted from paying the tax for the security system only assigned for your home business area but not your entire living area.
7. Casualty Losses
Casualty expenses are part and parcel of natural destructions like floods, earthquakes, storms, volcano eruptions, etc. In such cases, you can deduct the tax amount based on your lost items or avail of the full tax deduction in case of the complete loss of your home.
8. Business Equipment in Home Office
A tax deduction is applied to the depreciation of office-based furniture. The items included in depreciation are typewriters, chairs, tables, computers, desks, calculators, photocopiers, and other related machines.
9. Communication Tools Deductions
You may use a mobile phone or telephone for communication purposes, but you cannot deduct the amount of your first telephone from the tax. If you have another telephone connection for business purposes, you are exempted from paying the tax for it.
10. Property Tax Deductions
Property tax is the real estate tax exempted for the area used for home business tasks. You have to divide the area used for home business from the actual area of your home to get this benefit.
11. Depreciation Deduction
Depreciation means a decrease in the value of your house over the years. You can deduct the depreciated area of your home office only by dividing the depreciation cost of your home business from the actual depreciation of the whole house.
12. Home improvements Deductions
Home improvements are of two types – mandatory and luxury. The mandatory home improvements include the repairs necessary to run a home office, like painting, wall repairing, sewerage system blockage, leaking roofs, etc., that come under the category of allowable expenses. Whereas luxury improvements are the one that gives a new look to your home and are not mandatory. Luxury home improvements include adding panels, making a new roof, designing walls, changing floor tiles, etc. Luxury improvements come under the standard deduction category. IRS only allows you to deduct the actual cost of mandatory home improvements made for your home business area and not your living area.
13. Travel Deductible Expense
Business travel expenses can be deducted if it only includes your business trips. IRS strictly monitors business car trips for home businesses. You cannot include your trips within the business traveling. Moreover, you are only exempted from your business mileage deduction, not your spouse’s or children’s expenses.
14. Business Meals Deductions
IRS allows deducting 50% of your business meal, but it also has some restrictions. You cannot enjoy a luxurious meal in a five-star hotel. Business meal deduction only includes the basic meal to stay in form and gain the energy for working. Moreover, you cannot order a meal for an employee who is not present at a particular time.
15. Business Car Deductions
If your business requires you to use a car for business trips, you can deduct the total cost of your vehicle’s actual expenses. Moreover, tax deductions would be applied for your personal purposes. If you use the same car for business and personal activities, you can only deduct the vehicle expenses used for business purposes.
16. No deduction Policy
IRS does not approve of every sort of deduction. Few things are excluded from home-based office deductions like hobbies, entertainment, donations, fines, etc.
Is a home office tax deductible in 2023?
Yes, the home office tax deduction was applicable in 2023.
Can I write off my Internet bill if I work from home?
Internet bill also comes under business deduction. Therefore, home office deduction rules also apply to it.
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