It's common for sole proprietors to run multiple businesses from the same home office. The key is to correctly allocate your expenses between them. Here's how strictly you need to separate them for tax purposes, with links to IRS and TurboTax resources:
IRS Requirements for Home Office Deduction (General)
To qualify for the home office deduction, you generally must meet two main requirements:
- Exclusive Use: You must use a specific area of your home exclusively for business. This means the space cannot be used for both business and personal purposes. For example, if you use a spare bedroom as your office, it should not also be used as a guest room or for personal hobbies.
- Regular Use: You must use the area for business on a regular basis. Occasional or incidental business use doesn't qualify.
- Principal Place of Business: Your home must be your principal place of business, or you must meet clients or customers there regularly, or use it for storage of inventory/samples if it's the only fixed location for your retail/wholesale business.
You can find more details on these requirements in IRS Topic No. 509, Business Use of Home: https://www.irs.gov/taxtopics/tc509
Multiple Businesses in One Home Office
When you have two unrelated sole proprietorships sharing the same office space, the IRS states that you must use the same method (simplified or actual expenses) for all qualified business uses of the same home for a particular taxable year.
The important point is that you cannot deduct the office expenses multiple times. Instead, you need to allocate the expenses between the two businesses. The IRS does not provide explicit direction on how to do this, stating only that the method you choose must be "reasonable."
Here are some "reasonable" methods for allocating expenses, as suggested by TurboTax and common tax practices:
- Based on Time: If you use your entire office for both businesses, you can allocate expenses based on the percentage of time you dedicate to each business. For example, if you spend 60% of your office time on Business A and 40% on Business B, you could allocate 60% of the home office expenses to Business A and 40% to Business B.
- Based on Space/Equipment: If each business requires specific equipment or dedicated areas within the office, you could allocate expenses based on the square footage used by each. For instance, if Business A's equipment takes up 75% of the office space and Business B's takes up 25%, you could use that allocation.
- A Combination: You could use a combination of time and space. For example, if 50% of the office is dedicated to equipment for Business A, and the remaining 50% is used for both businesses, you could further split that remaining 50% based on time.
How TurboTax Handles Multiple Businesses
TurboTax generally allows you to enter home office information for each Schedule C business. When you have the same physical office space for multiple businesses:
- You'll likely enter the home office data for each business.
- You'll be asked to divide the total square footage of the office space between the two businesses based on a reasonable allocation method (e.g., 50/50, 60/40, etc.).
- TurboTax will then calculate the appropriate deduction for each business, ensuring the total deduction doesn't exceed what would be allowed for a single business.
See this TurboTax article for more guidance: If I run multiple businesses from my home office do I just deduct it once for any of the businesses?
And for how to allocate expenses: I have two businesses in my home office. It is asking for the allocable home office expenses.
Important Considerations:
- Documentation: Regardless of the method you choose, keep detailed records to support your allocation. This includes logs of time spent on each business, notes on dedicated space, and all receipts for home office expenses.
- Simplified Method vs. Actual Expenses: The IRS offers a simplified method ($5 per square foot, up to 300 square feet) or the regular method (calculating actual expenses). If you have multiple qualified business uses of the same home, you must use the same method for all of them. The simplified method for multiple uses is limited to a total of 300 square feet, which you must allocate among the qualified business uses.
- No Double Dipping: The absolute rule is that you cannot claim the same expense more than once. The allocation ensures that you're only deducting the legitimate business portion of your home office expenses across all your businesses.
You don't need a physical wall separating your two sole proprietorships within the same home office, you do need to maintain clear and reasonable records of how you allocate the use and expenses of that shared space between them for tax purposes.
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