When setting up an office, there are a number of tax implications associated with your decisions. For instance, if you work from home, you can claim a portion of your home office space as a deduction. There are also implications that come with leasing business equipment. Business-related write-offs can be tricky – so don’t guess. Be sure to work closely with your accountant and other business-focused tax consultants.
Home office deductions
If you use a home office, you can claim a tax deduction based on your use of the space. Deductible expenses may include the business portion of real estate taxes, mortgage interest, utilities, insurance, rent, painting, and repairs. You can do this by basing it on the percentage of your home that the office represents. For example, if the square footage of your office is one-tenth of the total size of your home, you could deduct one-tenth of your expenses on each of those items as a business expense.
Alternatively, you can claim $5 per square foot up to a maximum of 300 square feet. This is in addition to any other direct business expenses that are tax deductible.
If you lease business equipment, you typically are entitled to deduct your rental payments. But the IRS might review your tax deduction to make sure that the lease isn’t really an installment or conditional sale. Things that could serve as red flags for the IRS include:
- You acquire the property title after paying a certain amount of rent.
- Your rental payments clearly exceed the fair rental value of the property.
- You build equity in the leased property with a portion of your rental payments.
- A portion of your rental payments is designated as, or seen as, interest or its equivalent.
Current or Capital Expense?
For tax and accounting purposes, one common issue that small business owners face is understanding whether certain expenses are considered everyday costs of running a business, such as rent or utility bills, or if they are capital expenses. Capital expenses are major expenditures on such things as assets, equipment, land and vehicles.
Generally, capital expenses are deducted over the course of a number of years, or capitalized. This is also known as depreciation. An exception is the use of a Section 179 deduction. This is an exception to long-term tax write-off rules. It allows a small business to write off the full cost of equipment, up to $500,000, in the year in which it is purchased.
All of the information here is best reviewed with your tax advisor or a CPA, who can provide an expert opinion and knowledgeable advice.