Common Home Office Tax Traps

by | Feb 14, 2024 | Home Office | 0 comments

50% of businesses in the U.S. operate from home, and 60% of home-based businesses are “nonemployer” businesses. Additionally, 69% of start-ups begin at home. If you’re a small business owner, you may be able to take a tax deduction for using your home for business purposes. In 2020, 11.1 million of the 28.4 million sole proprietors who filed Schedule C with their Form 1040 claimed a home office deduction.

However, there are certain traps you should avoid when claiming the deduction. Here are five of them:

  1. Mixing business with pleasure in the office space: Your home office space must be used for business “regularly and exclusively.” If you use your kitchen table or the family’s media room for personal purposes, you can’t claim a deduction. If you use the same space for a hobby and business, you also can’t claim a deduction.
  2. Being an employee: If you’re an employee, you cannot claim a home office deduction since the miscellaneous itemized deductions subject to the 2% of adjusted gross income floor have been suspended until 2025. However, if you’re the owner of an S corporation and run the business from your home, you can use an accountable plan to reimburse some expenses of your office.
  3. Having another business location: The home office deduction is mainly limited to those who use their home as their principal place of business. If you have an office in another location and choose to work from home, you can’t claim a deduction. If you work mainly at customer locations but also perform significant administrative tasks from your home, you may be able to claim a home office deduction. Additionally, if you use your home to meet or interact with patients, clients, or customers in person, you may also be eligible. Finally, if you have a separate, freestanding structure (such as a studio, workshop, garage, or barn) that you use exclusively for business purposes, you may also be able to claim the deduction.
  4. Having the business pay rent: If your business is incorporated, you can have the corporation pay rent for use of your home office space. However, you must report the rent as income and can’t take a home office deduction as an offset.
  5. Failing to consider the impact of the deduction on other tax rules: The home office deduction reduces net earnings from self-employment, which affects contributions to qualified retirement plans for self-employed individuals. While the deduction reduces what’s paid in self-employment tax and the additional Medicare tax, it also reduces the deductible contributions to a SEP or 401(k) plan.

Of course, this article is just meant to be helpful guidance, not expert opinion. Always seek the advice of a tax or accounting professional, not some random blog on the internet.

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