Home-based business owners can enjoy some big pluses come tax time
through the deductions allowed for the business use of the home.
As a home business entrepreneur, you can deduct the expenses used to
maintain the space that you use for your business. If you use 5% of your
residence as a home office, you can deduct from your taxes 5% of your
utilities, mortgage interest or rent, insurance, repairs, maintenance, even
private trash removal costs and other expenditures that can be attributed to
that space. You can even depreciate the portion of a residence used for
business. As a result, the more deductible expenses your business can claim,
the less your tax liability becomes.
Word of advice, however: the Internal Revenue Service is taking a close
look to these home business deductions. The last thing you'd want with the
IRS is to be called for audit.
So what do you need to watch out for when taking these home business
deductions? Here are the things to look out for:
1. Make sure that the space you are deducting is exclusively used for
business.
One of the common mistakes home-based entrepreneurs make is to deduct
spaces in their homes that have both personal and business uses. Alas, that
is not acceptable. The IRS looks at the home as two separate properties -
one used for personal purposes, the other for business - and you are only
allowed to deduct part that is used for business.
For example, a room where you have your home office and used exclusively
for business is deductible. However, if you use the family room to write
your reports and make phone calls to clients, but your family also uses that
room for entertainment and for hanging out, then you cannot deduct the
family room.
2. You can only use home business tax deductions if you have made a
profit.
Home business tax deductions cannot be used to create a business loss.
You are not allowed to claim these deductions from the business use of your
home, if doing so will result in a loss. If your business is already at a
loss even before claiming the home business tax deductions, you also cannot
claim these deductions.
The good news, though, is that you can use the excess of these expenses
forward in succeeding years.
3. Make sure the square footage you claim is realistic.
The IRS can question you if they think that the square footage you are
claiming is too big for the type of business operation you are running.
For example, you are running an information website where you publish
articles on the Web and earn via advertising. Then you make a claim that 50% of
your 4,000 square feet home is used for your business. The IRS may have a hard
time believing that a web-run information business without inventory will need
2,000 square feet to operate.
4. Learn the tax consequences of selling a house partly used for business.
When you sell your home and if you have been depreciating the space for your
home office, IRS requires that you "recapture" the depreciation.
Designed to ensure that you don't get double benefit, the rule requires that you
adjust the profit made on your house to account for the depreciation write-offs
that enabled you to lower taxes prior to selling the house. However, if you can
prove that you did not claim for depreciation, then you can enjoy a relief from
this "recapture."
5. Keep complete documentation.
Make sure that you have sufficient documentation and receipts for every
deduction you take. Deducting the cost of running a home-based business can help
lower your taxes, but complying with all the IRS regulations is not that easy.
You need to be prepared with ample documentation and receipts for every
deduction you take.
