Taxes and The Booth Renter: How To Deduct A Portion Of Your Home On Your Tax Return.

Are You a Booth Renter or An Independent Contractor?

If you rent a booth at a salon, or you work as an independent contractor, you are allowed to deduct the portion of your home used for administrative purposes.

Most, if not all of your time at the salon is dedicated to serving your client’s needs.  You provide a service, prepare a receipt for the service, your client pays you, books her next appointment, and leaves.  Some of you sell product, which requires an additional transaction line on the receipt.

Why a Portion of Your Home is Deductible

In today’s paperless society, most clients pay using a credit or debit card.   So between credit/debit card transactions, copies of client receipts, and your personal receipts from the purchase of inventory that you sell or supplies you use in your business, you need a quiet area to administer to the administrative side of your business.

Dedicating An Area In Your Home For Work

Most of my clients use a small area in their home for this purpose.  A percentage of your home, based on total square footage, a percentage of utilities, and a percentage of other qualified home expenses can be deducted on your tax return as long as you qualify for the deduction.  The IRS has come up with an alternate way of taking this deduction called the Safe Harbor method.  The Safe Harbor method allows you to use a standard pre-calculated amount which means you do not have to spend the time coming up with the required calculations needed to take the deduction.

Direct and Indirect Expenses

If you satisfy all the required tests, you may deduct both direct and indirect expenses.  Direct expenses benefit only the business and are fully deductible, for example, painting the walls of your home office.  Indirect expenses on-the-other-hand, affect both your business and your primary residence.  Examples of indirect expenses are homeowners insurance, property taxes, utilities, alarm system, some home repairs, and rent if you do not own your home.

Indirect expenses are calculated based on a percentage.  For example, if your entire home is 2,000 square feet and your home office occupies 300 square feet, the percentage of your home used for business is 15%.  As a result, you can deduct $37.50 from a $250 monthly electric bill ($250 x 15%).

Home Office Expense and The IRS

Although the home office deduction is a heavily audited area by the IRS, there is no need to worry if you follow the rules.  Section 280A(c) of the tax code requires that any selected area used should be devoted EXCLUSIVELY to business on a regular basis.  This is not to say that an entire room must be dedicated solely to your business. However, the area used for business cannot be used for any other purpose.  For example, your home office cannot double as a family room.

The next time you speak with your accountant, ask him or her if you qualify for the business home office deduction.