Business Use of Home
Example in Action
If you designate 150 square feet of your 2000 square foot home to exclusive business use and pay $2,000 a month in rent ($24,000) per year, you could receive a deduction of $1,800.
THE QUICK HIT
If you use your home to conduct business for your dental practice, you can set-up a home office and receive special tax breaks.
This deduction has two big advantages.
1. A portion of your rent, mortgage interest, utilities, and other home expenses will count as an individual tax deduction. Please note this portion of the deduction tends to be the largest benefit for renters, as they otherwise receive no tax breaks for their personal rent expense. Homeowners, on the other hand, already receive a partial tax deduction for home mortgage interest and property taxes.
2. A secondary benefit of the home office is how it will help your business miles. The IRS does not consider miles driven when “commuting” to work as business miles. Less business miles, less of a tax deduction for having a vehicle. However, when you have a home office, anytime you leave your house and go to any other business location (like your practice), you are traveling from one place of business to another place of business. The miles then become business miles.
You always hear about people taking their work home with them, emotionally and physically. This is often the case for many dentists as they embrace the lifestyle and challenges of becoming a small business owner. For dentists, they do things at home, such as, complain to their spouse about rude patients or mull over the inability to find skilled staff to fill office needs. Dentists also do legitimate business activities such as review client charts, take care of administrative tasks, and make important business decisions. Sometimes, there are discussions done at home that you would not feel comfortable doing at the office where staff members (even the office manager) may hear. The home office has been an area of concern for many taxpayers because of past IRS scrutiny, but there are many legitimate reasons why a dentist needs to do certain work from home.
In addition to conducting business from home, you might also use your home to store things for the office. For example, if you are storing patient charts in your garage or stashing boxes of extra floss in your attic, the space used for the storage of these business goods may qualify as a business deduction.
Before we get in to the details of how to qualify for this deduction, please keep in mind that your legal structure and employment status will impact the effectiveness of this deduction. In general, this deduction is best suited for a sole proprietor, owner of an S-Corporation, or LLC member. If you are an employee, it will be difficult to receive much benefit from this deduction as your deduction has to clear certain hurdles that a business owner or independent contractor does not have to clear.
To qualify for this deduction, there are some important guidelines you need to follow.
First, a location in your home needs to be used exclusively for business related to your dental practice. We realize this may seem unrealistic, as some business may be done on the kitchen table, living room sofa, or floors of your bathroom as you cry about your woes. However, this is how the IRS has defined it. You can designate a corner of a room, an entire room, or other area of the home that you will use only for business purposes. If there is ANY personal use done in these locations, you don’t qualify.
Once you have designed a portion of your home for exclusive business use, measure the square footage of the business-use space. The square footage of your workspace versus the total square footage of your home will then be used to calculate the deduction.
Next, you want to determine all the costs incurred for the year related to maintaining your home, utilities, rent, property taxes, mortgage interest, internet, etc. We would not include the awesome pool you build in your backyard or the beautiful kitchen remodel you did.
By following these guidelines and collecting this information, you now have the information needed for your accountant to calculate a deduction for having a home office. Your accountant will know best how to apply this deduction to your individual tax situation. For example, a sole proprietor that reports income on their personal tax return can use the deduction directly on Schedule C. However, an owner of an S-Corporation will need to set up an accountable plan to deduct these expenses inside the corporation.
While we cannot delve in to every scenario for your home office deduction, we encourage you to be reasonable in using this deduction. We have seen clients try to take advantage of this deduction. No, it is not reasonable to designate 50% of your home to exclusive business use, especially as a dentist. No, the cost of building a $15,000 closet for your child is not a maintenance expense. Do not try to bend the rules for a deduction the IRS may already feel is generous. However, if used properly with supporting documentation, you can confidently qualify for this deduction.
We recommend reading the following articles published by the IRS
Example in Action
If your practice is 5 miles from your home office, and you go to the practice 280 days per year (10 miles roundtrip) that results in 2,800 additional business miles each year. Simply using the 2017 mileage reimbursement rate, that results in almost $1,500 in increased mileage deductions.