Are You a Booth Renter or An Independent Contractor?
If you rent a booth at a salon or work as an independent contractor, you can 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 additional administrative work.
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 receipts from the purchase of inventory that you sell or supplies you use in your business, you need a quiet area to work on 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 developed 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 as a deduction. Using the Safe Harbor method will enable you to save the time it would have otherwise taken to add up and calculate your home expenses for that year. My suggestion is to calculate the deduction both ways and use the most beneficial method.
Direct and Indirect Expenses
If you satisfy all the required tests, you may deduct direct and indirect expenses. Direct expenses benefit only the business and are fully deductible, for example, painting the walls of your home office is a direct expense. Indirect costs on-the-other-hand, affect both your business and your primary residence. Examples of indirect expenses are homeowner's 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 of your residence. 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 $450.00 of a $3,000 yearly electric bill ($3,000 x 15%).
Home Office Expense and The IRS
Although the home office deduction is a heavily audited area, 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 them if you qualify for the business home office deduction.
