Because of the nature of your job - serving clients in your salon - you may not have thought you could qualify for a Home Office deduction on your taxes. But I have good news for you: in your current set-up, you may be able to use a Home Office deduction on your tax return! Read on to find out how to qualify, as well as situations in which you cannot use this handy deduction.
I do all of my business in my salon. How can I claim a Home Office deduction?
Almost all of your business takes place in your salon. You serve clients, support employees, and take payments there. But where do you do your bookkeeping? Where do you place orders for supplies? Where do you do your social media marketing?
The qualifications for a standard Home Office deduction state that:
The last point may be the one that leads you to believe you don't qualify, but here's the loophole. If your salon does not have an office space where you can regularly do your bookkeeping, ordering, and marketing, then you have a home office, and therefore may qualify for the deduction.
What disqualifies me from a Home Office deduction?
If you are a W-2 employee, then you cannot apply for the Home Office deduction. As well, if your 'home office' doubles as your living room, kid's bedroom, or kitchen, you can't call it a home office. If it's a shared space in your home for any other activities besides crunching numbers, it won't qualify for a deduction.
Because S-corporations hold a special tax status, your company will need to have an accountable plan to allow you and any shareholders to claim a Home Office deduction.
If your business had a loss for the year, you cannot claim a Home Office deduction, as this deduction can only be claimed against your business income. It's also important to note that you cannot create a loss by claiming a Home Office deduction.
What type of deduction should I claim? (Simplified vs. Regular)
If you are a busy beauty professional who doesn't have the time or patience to wade through all of your utility expenses for the year, the Simplified method of deduction might be your best choice. The IRS has given a simple formula of $5 per square foot of your office space. The maximum square footage you can claim is 300 feet, and the largest deduction you can receive is $1500.
If you're a homeowner and presently deduct your mortgage interest, this method will, in most situations, provide you a higher overall deduction.
If you prefer to use the Regular detailed deduction method, you must first figure out which percentage of your home's total square footage is home office space. As an example, if your home's total square footage is 4000, and your home office is 300 square feet, your home office is 7.5% of your home. Using this percentage, you can calculate your Home Office deduction using IRS form 8829. Here are the expenses you can deduct for your home office:
I still have questions!
We understand that, especially if you're using a deduction for the first time, you'll have jitters, questions and you might feel a bit unsure. That's why we created the Beauty Biz Taxes course, which walks you through step by step how to prepare your own tax return as a sole proprietor or single owner LLC using free IRS approved software.