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The Rise of Home-Based Businesses: A Fundamental Shift in the American Workforce

Posted by Gregory Robinson | Jun 15, 2024 | 0 Comments

The rise of home-based businesses represents a fundamental shift in how Americans work. Home businesses offer a convenient and flexible way to earn income without commuting to a traditional office. They may also qualify for tax breaks in the form of home office deductions. Self-employed individuals, who pay their Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA), can reduce their tax burden by deducting some costs associated with running their home business. The Internal Revenue Service (IRS) has strict rules about who qualifies for this deduction, so it's important to understand whether you are eligible and which expenses are deductible.

Home Office Deductions: Who Qualifies and What You Can Claim

Under the Tax Cuts and Jobs Act of 2017, from tax years 2018 to 2025, W-2 employees cannot deduct unreimbursed employee business expenses, including the home office deduction, even if they work from home. Only business owners, freelancers, and gig workers currently qualify for the home office deduction. However, W-2 workers with a side-hustle home business that qualifies for the home office deduction may also claim the deduction.

According to IRS rules, you can deduct business-related expenses for the use of your home if you meet the following requirements:

  • You use a portion of your home to conduct business exclusively and regularly.
  • Your home is your principal place of business or a place where you regularly meet clients or customers.

Exclusive and Regular Use

The IRS defines an office-in-home as an area separated from the home's living area used exclusively for business, such as meeting customers, dealing with clients, maintaining books, and performing other business activities.

  • A home may be a house, apartment, condominium, mobile home, boat, or similar structure.
  • A separate structure on the property not attached to the home, such as an unattached garage, studio, or barn, may also qualify for a home office deduction.

Under the exclusive use requirement, your home office must be the primary space where you conduct business and be dedicated to work. Avoid using your home office for personal activities to ensure eligibility for the deduction. Minimal personal activities, like making a personal phone call, are acceptable as long as they do not overlap significantly with business activities.

The exclusive use requirement does not apply to some business activities, such as providing in-home services (e.g., childcare and elder care) or storing inventory at home.

The regular use requirement depends on the facts and circumstances of each situation. Working in a dedicated home office space eight hours per day, five days a week, or even several hours a day, likely constitutes regular use. However, irregular or occasional use may not satisfy this requirement.

Principal Place of Business

To determine if your home-based business satisfies the principal place of business test, evaluate if your home is the principal place of your trade or business by considering where you perform your most important business activities and where you spend most of your business activity time. The IRS notes that if you conduct business both at home and outside your home, you may still qualify for a home office deduction as long as you do not perform administrative or management activities at any other fixed location.

Types of Deductible Expenses

Home office deductions can be made using the simplified method or the regular method. The simplified home office deduction is based on the percentage of your home used for business, at $5 per square foot, up to 300 square feet. For example, if you have a 2,000-square-foot home and 10 percent (200 square feet) is dedicated to your home business, multiply 200 x $5 for a simplified home office deduction of $1,000.

The regular method for calculating the home office deduction also relies on a percentage of the home used for business. Unlike the simplified method, there is no limit on the maximum square footage. The regular method allows you to deduct actual expenses, including:

  • Depreciation
  • Mortgage interest
  • Insurance
  • Maintenance
  • Rent
  • Repairs
  • Utilities

Taxpayers can choose either the simplified or standard method for a given tax year. Once an election is made, it must be used for that taxable year, but taxpayers can switch to a different method the next year. Use IRS Form 8829 to calculate the deduction for expenses for the business use of your home.

Call Us Today

If you're unsure whether you qualify for the home office deduction, how much you can write off, or which method is right for your tax situation, contact us today. Schedule a meeting to discuss the home office deduction or any legal questions related to your home-based business.

About the Author

Gregory Robinson

Attorney Gregory Robinson is a native of Alabama. He earned his Juris Doctor (J.D.) degree from Mitchell Hamline School of Law and holds a Master of Business Administration (MBA) degree from Rice University. Prior to practicing law, he worked as a strategy consultant in the financial industry...

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