Blog | Entrepreneurship

Can You Deduct Your Home Office?

Other Business Tax Deductions to Consider

One of the many benefits Robert Kiyosaki teaches about becoming a business owner are tax deductions. Tax deductions are how President Trump can claim he pays zero in taxes. Some might wonder why employees aren’t afforded tax benefits like deductions—after all they’re doing all the work, right?

While this might seem unfair to employees, it’s important to remember that business owners take all the risk.

In fact, employees are legally required to be paid first. That’s right, before the owner. Failure to pay employees (and especially their payroll taxes) can lead to the big problems for the business owner.

But in exchange for the business owner having to follow so many employment rules, the tax code acknowledges the risk entrepreneurs take every day.

Four Types of Deductible Business Expenses

The average entrepreneur can save thousands, even tens of thousands, by paying attention to deductions by working with their tax advisor.

Entrepreneurs can deduct four types of business expenses:

• Start-up expenses: Getting your business up and running can be costly. Most entrepreneurs can deduct things like attorney fees, office and printing expenses, license fees, all of which are deductible.
• Operating expenses: Day-to-day expenses of keeping the business open are deductible in the year the expense is incurred. Salaries, rent, utilities, travel and auto expenses are all examples of operating expenses.
• Inventory costs: Be sure to work with a CPA if you have an inventory as these deductions are slightly different than others. But if you make or buy products to resell to others you have inventory and can be deducted as you sell your inventory.
• Capital Expenses: Capital expenses must be depreciated but include things like cars, equipment, office furniture, and other assets that have a useful life of over one year.

Home Office Deductions

One question I get a lot is regarding home office deductions. Many people believe that home office deductions are a huge red flag for the IRS. You might be surprised to learn that over two million Americans claim a home office deduction according to the IRS. If you do it right, there will be no problem.

There are three rules to follow to do it right:

1. It is the principal place of your business
2. It is separately identifiable space in your home
3. It is regularly and exclusively used for business

Once you’ve identified that your home office meets these requirements you can now start calculating your deductions.

There IRS allows you two methods to consider. The first, and the one most people use is the square footage method. Divide the number of square feet used for your office by the total square feet of your your home. This gives you a percentage of your rent or depreciation each year for your home office.

The number of rooms method is also worth considering. Say you own an eight-room house and use one room exclusively for business. This gives you a deduction ratio of 12.5%. It’s worth running your both numbers (the square footage method vs. number of rooms method) to see which one pulls in the higher number.

Other Considerations

Deductions are nice, but that should not be your only concern when doing business out of your house. You should verify whether your neighborhood is zoned to allow you to run a commercial enterprise from your home. Things like signage and vehicular and pedestrian traffic and parking concerns could raise issues with your city or homeowner’s association.

The other consideration is separating home and home office. Even if you’re sure you have the discipline to run a business out of your home, you need to take into account whether your family is and whether they’ll give you space and time to work.

Working from home allows you to be flexible in your schedule, cuts out commute time and means you can run “back to the office” if you forgot something that just can’t wait until the next day. Just don’t fall into the 24/7 trap of working where you live. It should be a real work-life balance.

For more information about running your business, reading my book, Run Your Own Corporation.