Have a Home Office? Here's What You Need to Know Before You File Your 2019 Taxes
Operating your small business from your home can not only improve your bottom line but also pay off in real dividends around tax season. Read on for guidance on tax-deductible expenses you can claim—and can't claim—for 2019.
Make Sure Your Home Office Qualifies for Tax Deductions
In 2018, the IRS updated its guidelines for small businesses and the self-employed who work from home.
First things first, is it a true home office? According to the IRS, a home office must be used solely for business purposes. That means any activity of a personal nature—surfing the web, paying bills, watching TV—cannot occur inside your home office.
Whose home office qualifies this year has also changed. Remote employees can no longer claim home office and non-reimbursable expenses from their employer. If you're self-employed, however, you're still eligible to deduct home office expenses.
How to Claim Home Office Deductions: Simplified and Regular Methods
There are two ways to claim your home office tax deductions. It's important to note that you can choose one method for 2019 and switch the following year.
The Simplified Method is aptly named and best suited to those with a small home office. HouseLogic explains that all you need is the square footage of your home office—up to 300 square feet—to arrive at your deduction in seconds. Here's the formula:
Home office square footage x $5 = Deduction
For example, if your home office is 300 square feet, your total tax deduction is $1,500 (300 x $5).
By contrast, the Regular Method can result in a higher tax deduction but requires careful tracking of expenses. On the upside, as NerdWallet points out, you can deduct mortgage interest, maintenance, utilities, insurance, and other expenses. If your home office occupies a significant portion of your home, the traditional method may be a better bet. If you'd like to use this method for 2020, start logging those expenses now to save time next April.
Tax Deductions Dos & Don'ts
If you've decided to go the traditional route, take a look around your home and office because there may be more tax savings than you realized. For a complete list of tax-deductible expenses, download the "Business Use of Your Home" from the IRS. Here are a few of the more surprising expenses that do and don't qualify.
- Home office décor. You can claim your desk, chair, coffee table, and even the carefully chosen wall art. Be sure that whatever you do deduct lives in your home office exclusively to avoid an audit down the road. The same goes for any equipment you use in your home office although it may qualify for depreciation. Read the guidelines carefully.
- Snow removal. If you live in a wintry climate, not only can you deduct paying the kid down the street to shovel but you can also deduct the shovel. Check the rules around square footage of your home office to ensure you qualify for this break.
- General home expenses. Everything that goes into the upkeep of your home may also impact your home office. Tax-deductible expenses may include utilities, cleaning services, trash removal, water, gas, and more.
- Landscaping and lawn care. Unlike snow removal, taking care of your lawn is not tax-deductible. The only caveat is if your small business is in this sector. Investing in your curb appeal is still a good idea, however. It increases the value of your home and presents a desirable first impression when clients visit.
- Home office spillover. As mentioned above, the IRS has drawn a clear line between office use and personal enjoyment. For example, if the dining room table doubles as your meet-and-greet area for new clients, it doesn't qualify.
- Home office renovations. Small home repairs may qualify but major renovations like new flooring typically don't. If an upgrade can boost your business (and your happiness), explore how some homeowners fund those plans with a Hometap investment.
Building Your Business Year-Round
Home office tax deductions are one way to save on overall business expenses. Who doesn't look forward to a refund check? Keep in mind, though, that tax rules are unpredictable and cash back is not a sure thing. The good news for small business owners is that there are a number of other ways to secure the funds needed to grow your business.
Taking out a loan may seem an obvious, if scary, choice. Weigh the pros and cons of a small business loan versus a home equity loan before you sign.
For the risk-averse, taking on an additional loan may be a nonstarter. This is where owning your home can come in handy and more helpful than you realize. With a Hometap Investment, you can tap into your equity without any interest or monthly payments. That translates into near-immediate access to the funds you need now in exchange for a share in the future value of your home.
Take our 5-minute quiz to see if a home equity investment is a good fit for you.
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The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.