Posted by Elliot Kravitz, ATP

Home Based Tax Deduction for Two Businesses

Home Based Tax Deduction for Two Businesses

More people are choosing to work from home with the rising influence of computers and information technology in the workplace. Working from home allows you to deduct home office expenses on your tax return and also, the benefit of not having long commutes and having your own freedom to set your own working hours. But you should observe special rules when claiming the deduction when you share working space with your spouse, or when you run two or more businesses from your home.  

On your tax return, you will be allowed by the home office deduction to deduct part of your home costs as a business or employee expense. Generally, you can claim the deduction if you have a dedicated workspace and the office is required by your employer and is the principal location of your business. You can also claim the deduction for a free-standing structure such as a garage that you use only for business, or a space that you use to regularly meet clients. 

To qualify for the deduction, you cannot use an area for personal activities or personal storage so you have to designate a specific area in your home as a home office. As long as the area you claim has an identifiable space, it is okay even if it is just a room or just part of a room. The home office must qualify as your principal place of business for both activities if you have two separate businesses otherwise you cannot take the deduction for either. For example, you can take a deduction if you convert one of your rooms into a design studio and earn extra income doing freelance work. However, you cannot claim the deduction for either activity if you also use the studio to do work for your regular job even though your employer does not require you to work at home. 

Multiple Businesses

You must file a separate Form 8829for each activity if you have separate business activities and they both meet the qualifications for a home office deduction. Figure out the percentage of your home that each space takes up if you use a separate office space for each activity, and use those figures when calculating your deductions on the form. You can split the deduction between the two activities if you use the same space for both activities. 

Multiple Users

You should split the deduction between the two of you if you and another person both use the same home office space for qualified business activities. You should consider how much of a space is dedicated to each person’s equipment and storage, and how much time each person uses the space when splitting the deduction. 

Other Important things to take note for a home-based business

  • Method to simplify Home Office Space calculation

For home office space deduction, the IRS has announced a new simpler calculation method. You can use the old calculation or the new simpler method to deduct home business costs for the space used exclusively and regularly. The simple method can save you time and mistakes if you have a smaller space. 

As mentioned above, for smaller locations, it is best to use the simple method. For a maximum of $1,500 per year, you can deduct $5 per square foot for up to 300 square feet. 

You don’t have to run calculations to figure out the percentage and not to keep track of all your home expenses are some of the advantages of this method. It is a method for a small area and when you use the simplified method, you can’t take the depreciation deduction. 

  • You should always be prepared for an IRS audit of your home business

The IRS targets home businesses, that’s a myth going around. You should still be prepared just in case the IRS does choose to inspect your home business if you have one. The IRS wants to make sure that your home office is used regularly and exclusively for business purposes and you are not violating any rule or requirement. 

  • Home-Based deduction limits

Deductions for home-based businesses are limited. You can’t take the deductions if they result in a business loss but you can deduct home business expenses to reduce your business income for the year. There are many resources to assist in its completion despite the fact that the calculation for this limit can be complicated. 

  • Travel expenses to and from a home-base business deduction

Under certain circumstances, you can deduct business-related car expenses for travel back and forth for business purposes if you operate your business from your home. 

If you’re having a hard time calculating deductions or in preparing your taxes, you may want to consult a tax professional who is experienced and knowledgeable about the rules of taxation. You may be able to save money and time by trusting a tax professional instead of doing it all yourself to avoid mistakes or miscalculations.

Elliot Kravitz, ATP
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