Maybe You Can Take that Home Office Deduction After All

Here in the United States you can get a Federal income tax deduction for having a home office.

With so many entrepreneurs and small businesses operating out of home offices (estimated from 10 million to 20 million businesses), the home office deduction could be significant.

I say “could be” significant because, if you’re like me, you don’t take a home office deduction.

Part of the reason is the complexity in the tax rule. The home office deduction is needlessly complex. You have to calculate square footage, for heaven’s sake. Apparently, this deduction is underutilized, and for once the IRS agrees (I’m not kidding!).

Well, the good news is, bills have been introduced in both the Senate and House of Representatives to simplify the home office deduction rules. Representative Charles Gonzalez (D-TX) and Senator Olympia Snowe (R-ME) introduced companion legislation in both houses of Congress, called the Home Office Tax Deduction Simplification and Improvement Act.

The Act will create an optional standard deduction for small business owners in lieu of the square footage calculation. Also, there is a nod to the way small businesses operate today over the Internet, with two key changes according to the National Small Business Association:

“First, to reflect an economy in which many business owners conduct business through the Internet or over the phone, the legislation would allow the home office deduction to be taken if the taxpayer uses the home to meet or deal with clients regardless of whether the clients are physically present. Second, the bill would allow for de minimis use of business space for personal activities so that taxpayers would not lose their ability to claim the deduction if they make a personal call or pay a bill online.”

The Small Business Administration Office of Advocacy applauded the moves by both legislators, noting:

“… tax compliance is 67 percent more burdensome for the smallest businesses compared to their larger competitors. Tax complexity, combined with the fact that 53 percent of America’s small businesses are home-based, prompted Advocacy’s support ….”

I also applaud this legislation. If small businesses are to thrive, particularly during a down economy, we need less regulation, less paperwork, less tax, less government. All of those add expense and make it harder to operate a business. Each burden may seem like a small thing by itself … but keep piling them on and soon you have a mountain of small things.

Unfortunately we’ve had more more more of taxes, government and regulation in recent years, from both political parties. It’s good to see things moving in the right direction, even if it’s just one thing like simplifying a tax deduction.

For details, please see Representative Gonzalez press release and Senator Snowe press release.


Anita Campbell Anita Campbell is the Founder, CEO and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses.

12 Reactions
  1. Here in Sweden it is pretty hard to deduct things for your home office. It has to be really separate from your private area of your home, with separate entrances and so on. I am glad to to see that things are getting easier for home based businesses.

    What’s the situation in my old student place, Manchester, NH? Will the “Live Free, Or Die”-state come around and become the leading place for small business? I am a bit worried when I read about people like Edward Lewis Brown are up too…

  2. Great post.

    I too run my business out of my home…and I can tell you that my accountant has opened my eyes to all sorts of things. I have been in the thick of it for 12 years and continue to find new ways to effectively tax plan. This is crucial to bottom line profits.
    The new legislation should prove to boost our bottom lines even more. With today’s economic climate we need it.

    Great site by the way

  3. I can sense a few more home based business after all of these. Hopefully, it will.

  4. I think they are finally realizing the shift from office based jobs to home based jobs. It’s great that they are actually encouraging us to take the deductions that we deserve. Keeping it simple and easier to manage taxes, I think will help keep people honest also.

  5. Amen!! We’ve gotten to know the rules over all the years that we’ve owned small businesses, but if we hadn’t used an accountant for day 1, we’d have gotten ourselves in alot of trouble (most likely) over the years.

  6. I second the Amen! It’s really nice to see something positive happening for those who work from home. It’s a great step forward and one that I’m sure many, like myself, will be taking advantage of, too. And when it comes to taxes, period, the simpler the better. It will enable many to easily get the deductions they’re entitled to.

  7. More lawmakers should spend time on productive bills like this one.

    Sean, good show about using an accountant. Best move we ever made in our biz….

  8. I agree with your comments about using an accountant, Sean. Not only can a good accountant help you maximize deductions and tax savings, but they can also help you understand your business better (based on your numbers).

    — Anita

  9. Oh, and PizzaforaDream, that’s another great point: a good accountant will keep you out of trouble and save you that way.

    — Anita

  10. In Australia we can gain tax deductions for a home business and even though you need to estimate the space it is not too difficult as you ony need to do it once and then apply the % to your expenses. Anita as you mentioned in the post it can be significant especially when it includes, running expenses, rates, insurance, repairs etc.

  11. Indeed, PizzaforaDream! We need a good accountant to do the task. It’s always best to seek help from those who are expert on a specific field or else we’ll suffer the consequences.

  12. Well, Arthur. That proves the cliche that says: No man is an island!