Many small businesses, including franchises, are home-based businesses. Below are three things to consider before taking a home office deduction on your income tax.
1. You have to be very precise that this is your business, not your hobby. A home office needs to be just that – an office. It can’t double as the kids playroom or video game room where you happen to do your crafts.
2. According to the IRS, the home office has to be not only exclusively used for business but it also has to be your principal place of business and has to be where you conduct most of your business. It has to be in your house – or garage or guest house or on your property. It can’t be someone else s place. You may call on clients or conduct meetings offsite, but if you administer the business from your home office and you have no other place to do the administrative work, you can probably take the home office deduction.
3. It works by allowing you to deduct a percentage of your home expenses, based on the square footage of the office as compared to the size of the entire home. So you can deduct expenses including depreciation, rent, insurance, utilities, maintenance, and general repairs, based on the business use of that part of your home. First, the deduction for the home office cannot exceed the net annual income from the business. And and second, it’s important to document.
Of course, these deductions need to be discussed ahead of time with your CPA or tax accountant. But it might be wise to present these ideas so that you can receive all the deductions you really deserve.