Tax Advantages of a Home-Based
Business
What Kind Of Tax Advantages Do
Home-Based Businesses Enjoy?
You have probably thought of many of the
benefits of running your own successful
business from home. From the
independence of working for yourself to
making better income, there are many
reasons for starting a home-based
business.
Tax advantages are one big benefit that
you will enjoy with a business run out
of your home.
The Home Office Deduction
The Home Office Deduction allows you to
deduct some or all of the expenses from
your office at home and related
expenses.
To qualify for this deduction, your home
office must be the principal place where
your business is done. Secondly, the
office space must be used exclusively
for business use to qualify.
Detailed explanations of who qualifies
for the Home Office deduction are
defined in detail here
Home Business Deductions.
Building-Related Expenses
Repairs and improvements to your home
office are completely deductible. For
example, painting your home office is an
expense that relates directly to doing
business out of your home, so it is
deductible in full.
Mortgage interest is deductible as a
percentage of the total mortgage paid
for your home. For instance, if your
home office makes up 200 square feet of
your home's 2,000 square feet total, you
can write off up to 10% of the mortgage
interest for your home as a business
cost. Similarly, if you rent your home,
the percentage of your home used
exclusively for business use would also
be deductible.
Property taxes paid for your home also
qualify at the same percentage rate as
the mortgage.
Furthermore, if you own your home, you
can depreciate the appropriate share of
the home over 39 years.
Note that home expenses not related to
your business, such as landscaping
costs, cannot be deducted, even if you
are beautifying the appearance of your
home to enhance its appearance for
business purposes.
How Much Total Can You Deduct?
You can deduct at most in home expenses
for your home-based business what its
net profit is. Thus, if you don't make
much net profit, neither will you be
able to deduct many home office
expenses. This covers expenses specific
to your home itself, such as
mortgage/rent and property taxes.
Security
You may deduct the business cost of
security devices and monitoring fees as
a percentage of the protected area used
for business use of the entire protected
area (normally the entire home). This is
considered an indirect cost of doing
business.
Insurance
If you own your home and pay home
owner's insurance, you may deduct a
percentage of that expense, as with
mortgage or rent expenses. If you have
additional insurance coverage that
covers things specifically for the
business, you may deduct these expenses
in full as direct business expenses.
This may include special riders on your
insurance policy to protect business
equipment used exclusively for your
business.
Additionally, if you incur a loss that
is not covered by insurance, if it is
equipment used exclusively for your
business, you can deduct the entire
loss. If the property lost is for things
used both for personal and business use,
you may deduct just the percentage of
business use.
Utilities
Using the same percentage that you can
write off of your home calculated above,
you can write off utilities such as
electrical, gas, and other utilities as
business expenses.
Transportation
If you work primarily out of your home,
you can typically write off the
transportation expense of getting to and
from your clients' places of business
and other business-related
transportation costs. For the 2004 tax
year, the standard cost per mile that
the IRS allows you to deduct is 37.5
cents per mile.
Transportation as a deductible cost is
one area where detailed records is
critical. Typically, you will want to
record the odometer mileage of your car
before and after your trip to determine
the number of miles traveled.
Alternately, if you have places that you
often travel to, you can just record the
number of miles once and then multiply
by the number of trips to determine
total mileage This will prove much
easier than recording each trip's
mileage
Moving Expenses
If you move, you can deduct the business
portion of the move. For example, if
half of the items to be moved were
business-related, you could deduct 50%
of your moving expenses. Note that
moving expenses apply to sole
proprietors, LLC's, and S-Corporations
only. They do not apply to C
corporations.
If you have business-related moving
expenses, use form 8829, "Expenses for
the Business Use of Your Home" to report
them.
Phones and Communications
For a home business, the first phone
line into your home is considered by the
IRS as a personal expense. Additional
phone lines for business use, including
cell phones used for your business, are
tax deductible. Internet service
provider fees or broadband costs such as
high speed cable connections are
deductible as a percentage of business
use to total usage.
Meals and Entertainment
If you take a client or prospective
client out to lunch and talk about your
business, it is often tax deductible as
a cost of doing business. If you are
doing business out of town or at your
convenience on a business-related task,
you can typically deduct the amount of
meals. If you are entertaining a client,
the expenses related to the meeting are
deductible if they have a business
purpose.
Meals and Entertainment is one area that
is often abused by small businesses, so
if you plan to take deductions for these
kinds of expenses, be sure to keep
receipts. Also keep records of what the
money was used for to avoid any kind of
legal entanglements later on. As with
most business deductions, as long as you
stay within the IRS guidelines for what
is allowed and keep good records, you
can take this deduction safely.
You can only deduct 50% of the cost of
meals and entertainment.
Tax Preparation Expenses
Though not specific to home-based
businesses, the expenses that you incur
to have your tax return itself prepared
may be tax deductible.
Also, if you use tax-preparation
software to prepare your own business'
tax returns, the cost of the tax
preparation software is possibly
deductible.
Software
Software used for business purposes are
deductible as a business expense. Note
that for software packages in excess of
$500 in value, you may need to amortize
(write off over a period of time) the
software over 3 years. If you have
purchased software that costs more than
$500 per piece of software, consult the
IRS guidelines for software deductions.
Educational Expenses
Educational expenses incurred directly
to learn industry-specific skills needed
for your business are often
tax-deductible. For example, if you
purchase the Professional Bookkeeper
course to learn Accounting and
Bookkeeping skills to start your
business, this expense is tax deductible
as a start up cost once your business is
underway.
Record Keeping
Many small businesses let themselves get
cheated every year by not taking
deductions they are legally entitled to
on their taxes for fear of being
audited. As long as you stay within the
IRS guidelines for what is and is not
tax deductible and keep receipts and
good records, you are safe to take the
deductions you are legally entitled to.
The Home Office Deduction in particular
is a deduction that many have wrongly
assumed makes them a target for an IRS
audit.
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