Published January 18, 2010

Your Home Office: A Source of Tax Deductions

As a work-at-home entrepreneur, are you taking full advantage of the tax deductions of your home office? Whether you use your home office space for placing client calls, managing administrative details, or even meeting business clients, you could reap significant small business tax deductions.

It is certainly possible to write off a portion of your personal mortgage or rent as a small business tax deduction. However, there are restrictions involved. Many small business owners never take the home office tax deduction allowed by the IRS, while others mistakenly do so, even when their home office does not meet IRS requirements.

Here is a look at restrictions and guidelines that you can use for your home office tax deduction.

IRS Guideline #1: Primary Office

First, your home office must be your principal place where you conduct your small business activities. For your home office to be tax deductible, you must use it regularly as the primary place of your business.

Many small business owners rent or use other office space and occasionally work out of their home. Real estate agents are a good example. However, if you use a specific space in your home as a second office, then it does not count toward a tax deduction.

IRS Guideline #2: Exclusivity

Second, your home office must be exclusively for business purposes. For instance, if you have a desk and computer with internet connection in the corner of your living room, you cannot deduct the space as a home office tax deduction. Since you use that space as part of your regular home living space, it does not meet IRS guidelines for a home office.

Most small business owners who take a home office tax deduction use a spare bedroom or a garage as their dedicated office space. However, if you do use a space in your home, be sure you use it exclusively for your business. A spare bedroom that is occasionally used as a playroom for the kids or a guest room does not meet the home office guidelines. Similarly, you cannot park your auto in a garage used as your home office, nor use it as storage space.

How Much You Can Deduct

If your space meets these guidelines, you can deduct home-related expenses in relation to the square footage of the space. The expenses include mortgage, rent, utilities, property taxes, insurance repairs, and even home office renovation costs. For instance, if you use a spare room that is 10 x 10 feet for your home office, and your home is 2,000 square feet in total, you can deduct 5% (100 square feet divided by 2,000 square feet) of all the above noted expenses for your home office tax deduction.

A home office can be a great way for you, the small business owner, to save money. However, you can save additional money by taking the full small business tax deduction for your home office space. If you have additional questions about deducting your home office for tax purposes, talk to a tax professional to get the advice you need and enjoy the deduction you deserve.