If you run a small business from home, you may be entitled to certain tax deductions, provided you satisfy the requisite conditions. In this article, we will look at this IRS clause in more detail.
Running a business from home is comparatively cheaper than renting a separate edifice and running your business from there. A spare room, den, garage, or even a part of your living room can serve as a good home office. However, it is definitely not free of expenses. You do have to pay for utilities such as electricity, telephone, Internet, etc. The Internal Revenue Service (IRS) has a provision for tax deductions for home-run businesses under certain conditions. Let us look at these conditions presented below.
To avail any of the tax deductions, you have to produce valid proofs for the same. There are stringent rules if you wish to submit a claim. These proofs can help you in the event of a IRS audit.
Condition #1: Regular and Exclusive Use
Firstly, you are required to prove that you use your property regularly and exclusively for business purposes only. If you only use your home office occasionally or incidentally, then you cannot claim a deduction. Also, if you are using it for any other purpose, apart from or along with your business, then you are not eligible. The following examples will help you gain a better understanding of the above law.
Example: Mark runs a small business from his den. He works only as and when there is a demand for his business (like once in a month). He uses the same den for entertaining his friends on weekends. Under such circumstances, Mark does not qualify for a deduction (violation of ‘regular and exclusive’ use condition).
Example: Graham also runs a small business from his den and works on every weekend. He also has a small workstation in his kitchen, where he works, cooks, and also entertains his guests. In this case, Graham can claim a tax deduction for his den but not for his kitchen (violation of exclusivity condition).
You need not satisfy the exclusivity condition if you use the space for storing inventory of your business or product samples. The condition also becomes void if you run a qualified day care facility at your home.
Condition #2: Principal Place for Business
Secondly, you should use your home as a principal location for your business. This means that you should not run your business from any place except the one you are claiming for. Even if you do, your main business activities should be run from your home only. You will have to produce a proof that you meet your clients, patients, or other business associates at this place, in the normal course of your business. The example presented below is an illustration of the above rule.
Example: Joanne was an interior designer who worked from home, as well as had an office in the suburbs. However, she would meet her clients at her home office only. She also stored her catalog and books in the home office. In this case, Joanne becomes eligible for such deductions (provided she also satisfies condition #1).
There are a few deductibles you can claim under this head, as listed below:
- Home office
- Office supplies
- Other equipment
- Software and subscriptions
- Travel, meals, entertainment, and gifts
- Insurance premiums
- Retirement contribution
- Social security
- Telephone charges
Maintaining a log record of your meetings with clients is a good way of proving the business use of your space. If you want to avoid a very unpleasant audit, you must understand the home office deduction rules, and you must apply them correctly to properly claim your deduction. More information on this provision can be found at the IRS website.