Tax forms with yellow sticky note with the words tax deductions

Tax Deductions for Home-Based Businesses

Home-Based Business Tax Deductions

New Hampshire home-based businesses have many tax advantages. One of the best tax advantages being that of the home business office. Business owners can offset the costs of their home office as long as the area in which it is placed within the home is used frequently for business purposes.

For a home-based office to qualify as being a tax-deductible expense then the IRS has stated that it must meet one of the conditions:

  • The home office should be the primary place of business.
  • Meetings are held with your customers and clients in the home-based office.
  • The home office is still deemed part of your home, even though it may be detached.

Deductions are still valid to be claimed should you rent the home or apartment. A portion (approximately 10%) of rent is allowable to deduct as long as it relates in proportion to the space that is occupied by the home based office. Costs relating to home repairs may be deducted if they were related to the home-based business. The IRS only permits deductions for maintenance and repair to the area in use for the home-based business.

To work out the space allocated to the business office; you first should calculate the square footage of it and then divide that by the total living space of your home.

Utility-type costs may also be deducted that are in direct relation to the upkeep of the home-based business. A way to calculate the utility bill cost is to determine the cost of the utility bill should you not work from the home. For example, if the home is not occupied during the day then heating and air conditioning may not be operational or set only on low levels. Other electrical items like computers and lights would likely be off too.

Work out the energy that these items use; this will be your allowable tax deduction. The best way to calculate this figure is to record the total amount of time spent working in the home-based office and then calculate the utility costs associated with that time.

The allowable tax deductible costs are:

  • Electric
  • Gas
  • Water
  • Sewage

A portion of your garbage collection costs may also be deducted if they are directly attributed to your business.

It’s wise to not over claim on these sorts of deductions, the IRS has some very specific rules on home office space uses. For example, if you have a 6’x 6’ room, all items in the room should be for business-related purposes. You cannot have some furniture for storing personal things like clothes, books and decorations, for instance.

That space should be taken outside of the office space and should not be included for the deduction. The IRS often “red flag” these types of tax deduction because of the abuse that is often found by them when home office users claim their deductions! You should fill in the IRS Form 8829 for inclusion with the tax return.

Jean Martel will be pleased to advise you on all matters relating to tax deductions.