Work at Home Tax Advantages in Silicon Valley

The Bay Area has more startups than virtually any other region in the world. Many entrepreneurs in this area start with a home office. For others, telecommuting has become the norm, allowing a large number of their employees to work from home. Whether you are operating a business from your Silicon Valley home or you are a telecommuter, the work at home tax advantages are considerable. The challenge is that many who could take advantage of these tax savings fail to do so out of fear that they will not qualify and/or their return will be flagged for an audit by the IRS.

What Qualifies as a Home Office?

To be eligible for home office tax deductions, you must have an area of your home that is exclusively dedicated to business and meet the following criteria:

  • Your home office must be your principal place of business, or
  • Your home must be the place where you regularly meet customers, clients or patients.

There are some exceptions to the “exclusivity” rule. For example, if you had an EBay selling business and used your basement to store the products you ship out to customers, you could also use your lower level for other purposes, such as watching TV.

Separate Structures as your Home Office

In recent years, a growing number of home-based Silicon Valley entrepreneurs are using a detached structure as their home office. Some of the older homes have detached garages that can be used for this purpose. There are also sheds that can be purchased in virtually any shape, size and style these days that can be placed in the back yard. The shed can be customized to fit the needs of the business and because it is separated from the rest of the house, it offers greater privacy to conduct business. For separate structures used as a home office, the IRS is far more lenient; they agree that such structures are less likely to be used for personal enjoyment, so they allow you to enjoy the work at home tax advantages even if it is not your primary place of business.

What if you are frequently on the Road?

If you are a salesperson, you may spend a great deal of your time traveling outside the San Francisco Bay Area (or even traveling outside California) to do the majority of your work. In this scenario, although you may conduct most of your business on the road, if your home office is the primary place you do your billing and other administrative paperwork, and as long as you do not charge your employer rent to use your home for this purpose, it should still qualify as a home office.

What if you need another “Professional” Business Location?

For some home-based businesses, particularly in construction and other home service industries, it is important to have a professional office location just to give your business more credibility. Though you may conduct most of your business either from your home office or on-site, you may opt to rent a virtual office so you have a professional mailing address and maybe even a conference room for occasional meetings with clients. As long as your home is still your primary place of business and you spend far more time there than your virtual office, you should still be able to qualify for the home office deduction.

The Home Office Tax Deduction: Two Ways to Calculate

Once you have determined that your home is eligible for the home office deduction, you are able to deduct a portion of the following expenses:

  • Home Mortgage Interest
  • Property Taxes
  • Utilities (electric, business phone and Internet)
  • Home Maintenance and Repairs
  • Insurance

You can choose to calculate these expenses using the actual cost method or the recently added simplified method. With the actual cost method, you total your expenses, multiply them by the percentage of your home dedicated to business, and enter your calculations on IRS Form 8829. For example, if you own a 2 bedroom, 1500 square foot house in Santa Clara and use the 300 square foot basement as your office, you can deduct 20% of the aforementioned expenses.

With the simplified method, you deduct $5 for each square foot of your home used for business, up to a total of 300 square feet. While the simplified method is much easier to calculate, the deduction is limited to a maximum of $1500, so you will need to determine which way is more beneficial for you.

Other Small Business Tax Deductions

If you run a home-based business, there are several other tax deductions you may qualify for. These include:

  • Auto Expenses
  • Travel
  • A Portion of Meals and Entertainment
  • Equipment
  • Office Supplies
  • Advertising
  • Software and Subscriptions
  • Self-Employed Health Insurance
  • Social Security/Medicare
  • Other Qualifying Business Expenses

These expenses should be listed on your Schedule C (Profit and Loss for Business) attachment to your Form 1040.

What Entity Structure Should my Home Business Have?

Many home-based businesses start as sole proprietorships. However, this may not be the best entity structure to protect you from liability and provide the flexibility to grow. Limited Liability Companies (LLCs) offer several potential benefits for entrepreneurs, however, many worry about how an LLC would change their tax situation. The IRS allows LLC owners to be taxed as sole proprietors, allowing you to continue filing a schedule C and continue benefiting from the many home-based tax advantages. The right entity for your business will always depend on your specific circumstances, and it is best to discuss this with an experienced Bay Area business lawyer.

Jeffrey Miller is a Palo Alto business attorney and member of the Palo Alto Area Bar Association (PAABA). He provides skilled guidance on business entity formation strategies and all other legal matters related to California businesses. If you need any kind of legal assistance with your Bay Area business, call attorney Jeff Miller today at (650) 321-0410 or email him at jeff@jeffmillerlaw.com.