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MSM Mondays is our biweekly series of accounting insights for businesses, designed with business owners in mind.
As a firm that works closely with businesses in the construction industry, we know firsthand how important it is to understand the unique tax considerations that come with the industry. When it comes to home office deductions, there are some surprising ways that tradesmen, contractors, and other business owners in the industry can qualify.
Work at your customers’ homes? That doesn’t necessarily mean you can’t qualify for a home office deduction.
In order to qualify home office deductions, the typical baseline requirement is that the space in question must be used by the taxpayer as their principal place of business, a regular in-person meeting place for clients, or a separate/unattached structure used for business. For any tradesmen crafting goods from a space in their home, such as a garage or unattached structure, you may qualify for home office deductions. However, for a majority of contractors and other tradesmen who perform services for their clients, using their home for business purposes wouldn’t quite fit this definition. Clients are probably not coming to meet you in your home – you are most likely going to them!
Another way that you can qualify for home office deductions is by using a home office for administrative or management activities that are not performed in another fixed location. Even if you are spending most of your time meeting clients in their spaces and performing services for them, if you complete all of your admin and management work from a home office, you may still qualify for home office deductions.
Common deductible expenses when a taxpayer qualifies for home office deductions include mortgage interest, insurance, repairs, maintenance, depreciation, and rent.
Limitations on Qualification
There are a few final major limitations to note regarding eligibility for the home office deduction. First, employees are not eligible for the home office deduction, regardless of whether or not they work from home. This deduction is exclusively for business owners. Second, if you are storing your tools inside of your home, then the space that you use for this storage generally does not qualify for home office deductions.
Limitations on Amount Deductible
There are also several limitations on the amount that can be deducted for home office deductions. The IRS has an income limitation, where the deducted expenses cannot exceed a certain amount, based on the relevant gross income and deductions.
Additionally, you typically can’t deduct all home office expenses. There are two methods that the IRS allows for deductions. The actual expense method allows a taxpayer to deduct any expenses related directly to the business, and the proportion of indirect expenses attributable to the business. Indirect expenses are any expenses that are related to but not directly traceable to the business. For example, it is nearly impossible to determine how much of the utility bill for your property is attributable to your home office. This is considered an indirect expense. In this case, you would only be permitted to deduct the portion of the utilities bill attributable to the business. The simplified method, on the other hand, allows the taxpayer to deduct $5 for every square foot used by the business, up to 300 square feet.
The Bottom Line
Home office deductions present a great opportunity to reduce taxes for construction and trades businesses using their homes for business purposes, given they meet the specific IRS requirements. As always, it is essential to maintain proper documentation for any and all expenses that you plan to deduct. We always recommend consulting with a trusted advisor to determine what deductions you may qualify for and how to make the most of available tax benefits.
Keep Up With MSM Mondays
New to the series? Catch up on our previous article about Reasonable Compensation for S-Corp Owners to learn about the rules and requirements surrounding reasonable compensation for an S-Corp shareholder. Be sure to follow us on social media so that you never miss an MSM Monday.
Disclaimer
Please note that the information shared in MSM Mondays is intended for general informational purposes only. It is not a comprehensive analysis of every situation, nor should it be considered a substitute for personalized accounting, tax, or legal advice. Because every business is unique, we encourage you to consult with a CPA regarding your specific circumstances. If you have questions or would like guidance tailored to your business, our team is always happy to help!
