Tax breaks for home-based businesses go unclaimed

Many entrepreneurs who run businesses out of their homes don't take advantage of possible tax breaks.

by C. Yoder
updated May 11, 2023 ·  2min read

If you run one of the millions of home-based businesses in America, you might be missing out on a great way to save money. Some 53% of all small businesses are home based, according to government statistics. But only a tiny fraction of those business operators claim the tax deduction allowed for home operations. With 7 million businesses potentially qualifying, why do only 2 million take advantage?

Fear factor

First, there's the fear factor—many home-based business owners are afraid that claiming the lawful tax breaks might lead to an audit. Second, figuring the deduction can be complicated.

“This provision is designed to benefit the smallest of small businesses,” said Dillon Tayor, assistant chief counsel to the Office of Advocacy of the Small Business Administration. “It becomes more and more important as more people are working at home because the economy is bad.”

To claim the deduction, the business owner needs to play by the IRS rules. The space used for business may not be used for anything else. It can be a whole room, or a portion of a room. Figure the square footage your home covers, and then calculate the amount that is devoted to your home office. You can claim the same proportion of electricity, insurance, rent or mortgage, or other related business expenses.

Exclusive business use

In addition, the space must be used regularly for business, according to tax expert Don Schippa, of Detroit-based Tax Research Services. “The rules are simple. The biggest hurdle is that it must be an exclusively used area. A desk in the family room won't qualify—it's accessible to the kids playing video games,” Schippa said.

In general, business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit, according to the IRS.

Qualifying businesses

The tax concerns, of course, don't come up until you've considered other factors, such as whether local zoning regulations allow you to set up at home, whether you can conduct your business safely there, and whether personal contacts related to your business can be integrated effectively into in the home environment.

And if your startup is underwater, there will be no immediate benefit. The home office expense cannot add to your loss, but the expense can be carried forward to offset profits in the future when your enterprise takes off.

Greater filing simplicity

The IRS is pushing for greater simplicity in processing home business deduction claims. A simple solution would be to add an option to the current tax procedures which would allow business owners to claim a deduction in the same way taxpayers can now claim standard individual taxpayer deductions—just by filling in a single line on the tax return.

“This should be as simple as possible,” Taylor said. “The deduction is already on the books. This change would only make is possible for the people who deserve it to take it.”

For more information, see the IRS guide and directions for calculating the business deduction for use of your home.

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C. Yoder

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