One of the amazing benefits of being a direct sales consultant is the ability to deduct part of your home and home utilities from your taxes!
The home office deduction (or work from home tax deduction as some call it) as well as the mileage deduction will typically be your top tax deductions unless you hold inventory. So don’t forget this and you will pay less in taxes.
What Are the Requirements for the Home Office Deduction?
If you are a direct seller that works from home you should be able to deduct your home office. The IRS has specific home office deduction requirements, we’ll call them tests, to determine whether you can write-off your home office or not.
First, you must use the space ONLY for your business (an exception below). So if your “desk” is the dinner table that is obviously used for family meals you cannot write off this space. Also, this space must be your primary place of business. Direct sellers can claim this as their primary place of business even though we do home parties and vendor events.
Second, you must use your home office on a regular basis to perform work. Do you regularly do your calling and administrative work in this room?
The exception to this is if you store inventory in a room that is a shared use room you may write off that space. For example, say you’ve turned your den into your inventory storage area; you may deduct this from your taxes.
What Exactly Can Be Written Off for the Home Office Deduction?
There are two methods for calculating the deduction amount.
The first is the Regular Method. With this method you are able to write off a percentage of you expenses as well as the total cost of repairs to the part of your home used for business (e.g. paint for the home office). These include:
- Rent, if you rent your home
- Mortgage interest and Property taxes, if you own your home
- Home / rental insurance premiums
- Natural gas
- General repairs and maintenance on your home
- The full cost of repairs done on your home office
Let’s look at an example.
If this is my house and the highlighted bedroom was devoted to my business I will be able to write-off 11% of the cost of expenses listed above. This was figured by dividing the square footage of the room by the square footage of the whole house.
The second method, Simplified Method is very simple. Basically, you are allowed to write off $5 for every square foot of your home office. In the above example you would be able to deduct $745 (149 square feet x $5) from your business taxes. There is a limit of 300 square feet for this option, so the deduction with this method maxes out at $1,500.
Which method should you use?
The method that allows you the largest deduction for that year, of course! You can change the method used each year to maximize this deduction.
You might be thinking, how can I write all of that stuff off from my taxes? Think of it this way, if you went out and rented an office to run you business you would have to pay rent as well as all of these other expenses. When running your business at home you get to write the same things off. Pretty great, huh?
How Can the Home Office Deduction Increase Other Write-Offs?
Simply put, if your home office is your main place of work, whenever you drive to the post office (for work reasons), a home party, a vendor event or to meet a potential new recruit you can write off the mileage for that trip!
The IRS does not allow you to deduct personal commuting (IRS Commuting Rule). However, if you have a home office that qualifies as a principal place of business you are allowed to deduct your mileage from your house to those locations.
How Much Can I Save On My Taxes?
Use the calculator below to see how much you can deduct for the home office deduction for your direct sales business. It is pre-populated with the example above. All you need to do is change the numbers for your home office.
Are There Limitations to the Home Office Deduction?
There are a couple of limitations with the home office deduction.
- There is a limit to how much you can deduct. With either method you cannot deduct more than you make with your business. This means that taking this deduction cannot turn your company into a negative earning business. However, anything in excess to this limitation can be carried over to future years when you use the regular method.
- If you use the simplified method losses in excess of the limit (#1 above) cannot be carried over to future years.
Important Disclaimer: Everybody’s tax situation is different. What may be right for one person’s situation may not be best for another’s. Please consult a qualified accountant to discuss which method is best for your personal situation.