Starting a business at home without spending much on equipment, office structure, and other usual office expenses can help you make more money. You can earn from things you enjoy doing or get to follow your dream job. Running a business from home can also help you pay fewer taxes, simplifying things.
If you regularly use part of your home only for business, the IRS lets you subtract some work-related expenses. These expenses include rent, bills, property taxes, repairs, keeping things working well, and other costs related to your business.
Learn how your home business can use these deductions to save money in the long run.
What is the “exclusive test” about?
To qualify for a home office tax deduction, you must show that you only use part of your home strictly for work. The IRS wants proof that you have a specific area of your place dedicated as an office space. Make sure to use it just for your job, and don’t do any personal matters in there if you want that deduction to stick.
For instance, if you have a spare room that’s solely your business office, you can claim it for the home office deduction. But you can’t claim the deduction if you use a bedroom or living room for work and personal affairs.
Exceptions to the “exclusive use” test exist, such as businesses utilizing home spaces for inventory storage, product samples, or operating daycare facilities.
Moreover, you must be a registered business owner or an independent contractor to claim the home office deduction. Employees working from home for a company cannot claim this deduction.
Other things to remember about the exclusive-use rule include:
- You’re prohibited from making personal phone calls from the office.
- You must immediately leave your office whenever a family member requires your attention.
Who can claim this home office tax deduction?
This tax break applies whether you live in a house, condo, or apartment as long as you reside there. The deduction doesn’t apply if your living situation is more temporary, like staying at a hotel, inn, bed and breakfast, or if you own a rental property but don’t live there yourself.
Exclusive and regular use
Your business area should be solely dedicated to conducting business activities. For instance, using a spare room as your office and a play space for your kids may disqualify you.
However, there are two exceptions. If you offer daycare services for children, the elderly (65 or older), or individuals with disabilities in that part of your house, you might still claim business deductions.
Per IRS guidelines, this applies if you carry certification, a license, or approval as a daycare center.
The other exception is if you use the office area for storing inventory or product samples sold in your business.
Home as principal business address
Your primary business meetings don’t have to be in your home office; they should be your primary place for handling business matters. According to the IRS, that means regularly using the space for paperwork, scheduling appointments, and keeping records.
In the case of a home office situated in a separate building, like a converted garage, meeting clients is not a requirement for deductions. Instead, regular and exclusive use for work qualifies.
Also, if you have a regular job but run a side business from home part-time, you can still qualify even if you spend a lot of time at your regular job. This rule makes it easier for salespeople or tradespeople who primarily work elsewhere to claim deductions for their home office.
Can I get a tax break for working from home as an employee?
No, you can’t snag that home office tax break if you’re an employee working from home. It’s usually just for those who own businesses rather than regular employees.
Before the Tax Cuts and Jobs Act (TCJA), employees could write off work expenses, like the home office deduction, if their employer didn’t cover them. But in 2025, the government will stop allowing those deductions for employee expenses. People running businesses from home usually tick off the usual deductions when they do their taxes.
What expenses can I subtract from my taxes for my home-based business?
Home-based business owners often claim standard deductions on their tax returns. It’s wise to consult an accountant or financial professional to confirm your eligibility for these or other deductions not listed here. Here’s a breakdown of some standard deductions:
Home-related expenses
Figure out the portion of your home used for business by dividing your office space by your home’s total size. Accurate calculations help deduct the correct percentage of expenses.
Maintenance and repairs
You can claim those costs if you fix things for your home office. Direct expenses for your office are fully deductible, while indirect ones benefiting the whole home are prorated.
Other expenses
To be deductible, expenses must be regular and essential for your business. This includes costs like goods sold, business assets, startup expenses, using your car for work, and paying employees. Here is a complete list of items you can include under other expenses.
- Cost of goods sold: These are expenses used to calculate the cost of goods sold, including storage, factory overhead, direct labor, and product/raw material costs.
- Capital expenses: These are business assets, improvements, and startup costs.
- Employee payments: These deductible costs are for employee compensation.
- Retirement plans: This is a tax-advantaged savings plan for retirement contributions.
- Rent expenses: These are deductible payments for property use without acquiring ownership or equity.
- Interest: This pertains to deductible interest expenses on business-related borrowings.
- Business taxes: These are deductions for federal, state, local, and foreign taxes directly affecting your trade or business.
- Travel for business: The expenses must be related to business and adequately documented. Additionally, costs for supplies and materials used for business purposes within a tax year are deductible.
- Supplies and materials: These are deductible costs for business-related supplies consumed within a tax year.
- Professional services: These include fees for necessary professional services like accounting, consulting, legal counsel, or contract labor.
- Marketing and business development: You can write off expenses for getting new clients and holding onto the ones you already have.
Remember, seeking professional or legal advice ensures you take advantage of all eligible deductions.
Tips on how to claim home business tax write-offs
Claiming tax write-offs for your home business can help you save money. However, businesses are permitted to claim tax deductions for legitimate business expenses.
All deductions should be supported by receipts and documentation showing their business use. As long as deductions are honestly calculated, the business should remain in good standing with the tax authorities. Overly aggressive deduction claims increase the chances of a future audit. Compliance with tax regulations helps companies avoid scrutiny.
Record your taxes
Maintaining a business journal is crucial to handling an audit efficiently. It can be problematic if you’re audited without records to support your deductions.
To avoid this, keep a daily log of your home business activities. Record purchases on printer paper, attach receipts to hardcopy logs or scan them for digital records. Note mileage, phone calls, other expenses, and incoming payments.
Detailed accounts make audits easier. Condense daily reports into monthly tracking sheets to streamline tax preparation. It speeds up tax filing and offers a monthly overview of your business activities.
Invest in new office equipment
You can fully deduct office furniture, software, computers, and equipment in the year of purchase without needing to depreciate them. However, there’s an upper limit, and the items should be primarily used and necessary or beneficial for your business.
While these guidelines are generous, extravagant items like a 4K widescreen TV for the office might not qualify for deductions.
Upgrade your communication lines
If communicating with clients is essential or beneficial for your business, consider getting a second phone line or a dedicated business cell phone—both are fully deductible.
You can still deduct the costs even if your client conversations are occasional. Keep track of these calls’ dates, times, and purposes, and mark them on your regular phone bill for deduction during tax time.
Treat your clients
You can entertain clients and claim a tax deduction. However, business owners’ misuse of this write-off has made some home business owners hesitant to claim it.
Taking a client out for a meal and entertainment is acceptable. However, justifying a $200 deduction for a client who has brought significant business is more acceptable than claiming the same expense for a friend who paid a small amount over the fiscal year.
Hire family members
You can employ family members and deduct their salaries if their work can be accounted for and paid at standard rates. If your business can involve your spouse and kids, utilize their assistance. Typically, you’ll pay less than market rates for their help, and you can also deduct insurance premiums for them.
Children under 17 don’t have Social Security taxes but can contribute to a Roth IRA. This setup allows you to teach them work ethics and saving habits simultaneously.
Keep yourself updated on the IRS guidelines
A home business can be fulfilling, offering additional income and valuable tax breaks. Reviewing the IRS small business publications is highly recommended. These resources detail the deductions and the conditions required to claim them.
Maintaining accurate records and adhering to justifiable deductions is crucial. However, it’s also advantageous to maximize your deductions within the rules. While IRS guides might seem challenging, seeking guidance from a competent business accountant can save time and potentially reduce expenses.
