by Dale Haubrich
The home-based business community is exploding with more and more entrepreneurs choosing to set up an office and work out of their home. This option not only provides a level of freedom by allowing you to be your own boss but it also provides an opportunity to maximize your income. Below are some of the major tax benefits that you can take advantage of by operating your own home-based business from the comfort of your home.
Tax Advantages of a Home-Based Business Office
One of the major benefits of operating your home-based business is the Home Office Deduction. This deduction gives you the scope to deduct many of your office and business expenses. To take complete advantage of this deduction you must ideally designate a specific area of your home to be your home office. The area or room cannot be a shared room being used for other family or personal activities. For example, using your dining room table as your primary home office work space would likely disqualify you from taking advantage of the home office deduction. Best plan to avoid any questions, allocate a specific room in your home to be your home office.
For information on the qualifications for a Home Office Deduction refer to the IRS website.
Home Office Renovations
If you should do any renovations to your home office these added expenses are totally tax deductible. For example, adding additional book shelves and painting your office are expenses that you can totally deduct as they are related to operating a home-based business in your home.
Even mortgage interest is deductible. The deduction is based on the percentage of your home that you are using for office space. For instance, if your office room is 150 square feet and your total home’s square footage is 3000, you can write off up to 5% of your mortgage interest as a business expense. For renters, you can deduct the percentage of the office space as a percentage of your entire space being rented.
Property taxes are even deductible. The deduction is calculated the same as the Mortgage Interest Deduction.
In addition, you are allowed to depreciate a reasonable amount of your over 39 years. Be careful to read the IRS guidelines as there are some future tax consideration with this approach.
Any home expenses not directly related to your home office like lawn maintenance or fence repair are not valid home office expense deductions.
Security systems are eligible for deduction as are security monitoring fees. This expense is calculated like the mortgage interest as a percentage of the total home’s protected area.
If you have house insurance, it is an eligible as a business expense deduction. This deduction is calculated identical to the mortgage interest calculation. Insurance that is specifically used to cover business related items is fully deductible. For example, if you have a rider on your home insurance policy to cover your home business computer and related equipment that is used exclusively for business, this expense can be deducted in full. Should you face a loss that is not covered by your insurance policy, the loss is totally deductible.
Advertising costs related to your business are tax deductible. For example, you may wish to purchase MLM leads to assist you in building your business, these costs are totally deductible.
Utility expenses like gas, electricity and related utilities can be deducted as a business expense.
Transportation to and from your client’s workplace and other work-related travel is eligible for a business expense deduction. Refer to the IRS website for current tax year allowances for travel. The IRS provide a per mile expense allowance for business related travel.
A detailed chronological Odometer log of miles travelled to and from each client’s place of business and business related travel in general should be maintained to avoid future inquiries.
Moving expenses are a valid business expense deduction. The deduction allowed is based on the percentage of home-business related items that you moved. For example, if a third of the items you moved were for your home-based business then you can deduct one third of the moving expenses. These moving deductions do not apply to all corporate designations. For example, sole proprietor deduction allowances may be different form an LLC moving deduction allowance. Refer to the IRS website for details.
Phones and Internet Services
Second and subsequent phone lines for a home based business are deductible. The first line is considered to be for personal use and cannot be deducted as an expense. Cell phone expenses incurred for business purposes are totally deductible. Internet usage related fees (cable, DSL, etc) and associated charges are valid expense deductions. They are calculated based on business usage.
Client Entertainment and Meals
Taking a client or prospective client to lunch for business discussions is frequently allowed as a deductible business expense. Having to go out of town on business allows you in most cases to claim all meals, travel and accommodation expenses related to that business trip. Entertainment of clients for business purposes can be claimed within reason.
If you intend to claim tax deductions for client entertainment expenses be sure to keep all receipts to help you explain and resolve any possible future enquiries. Keeping a meticulous record of activity by retaining receipts will keep you within the IRS guidelines and help explain expenses and avoid the need for future explanations.
Tax Preparer Expenses
Most home-based business tax preparer expenses related to your home-based business are deductible, as well as, tax preparer software that you may purchase to do your own income tax return.
Home Business Software
Computer software that is used in the operation of your home-based business can be deducted as a business expense. There is a limit on the amount of computer software that can be deducted at one time. Depending on this limit you may have to amortize the expense over a number of years. Check the IRS website for guidelines.
Most educational expenses related to improving your business skills relative to your business are valid deductible expenses. For example, if you were to purchase a course on starting a home-based business, this would be a valid business expense and tax deductible.
Is There a Maximum Deduction?
You can only deduct to the maximum of your home-based business net profit. If your home-based business does not have a profit you will not be able to deduct any home office expenses.
Home-Based Business Tax Advice
As you can see there are many tax advantages to owning and operating your home-business from the comfort of your home. Along with this added responsibility of operating your own home-based business comes significant income rewards. To maximize the deduction as and your income understand the extent of each tax benefit and also maintain quality records of transactions to leverage the tax benefits to the maximum. Please refer to the IRS guidelines for more in-depth information on each of these tax deductions.
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