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An important part of the tax season is knowing what you are
qualified to deduct in your tax returns. For home business
owners, this is a tricky proposition. There are a number of
rules that you must meet before you can deduct your business
expenses and your home expenses.
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First off, you must meet specific requirements in order to
deduct expenses related to the business use of part of your
home. Luckily, new rules were introduced last year that makes it
easier for home business owners to qualify their home office as
their main place of business. Be forewarned, though, deductions
may be limited.
The IRS defines “home” for tax purposes as any home
business space, including a house, apartment, condominium, or
boat. The term also includes any separate structures on the
property, including garage, studio, bard or greenhouse. The
government requires that you must meet the following tests in
order to claim expenses for the business use of your home:
- Your use of the business part of your home must be
exclusive, regular, for your trade and business and
- The business part of your home must be one of the
following: - Your principal place of business - A place
where you meet or deal with patients, clients or customers -
A separate structure (not attached to your home) you use in
connection with your trade or business.
For a more detailed explanation of the above requirements,
read our earlier article “Tax Time: Check What You Can Deduct
from Your Home Office” at http://www.powerhomebiz.com/vol5/TaxTime.htm
If you meet the above tests, that’s the only time you can
qualify for deductions for business use of your home. If you do
not meet the tests, you cannot deduct the use of your home but
you can still deduct all of your legitimate business expenses.
If you meet the above tests, your next step is to determine
how much you can deduct and what you can deduct. Of course, you
can expect more limitations along the way. Your deduction is
restricted to the following:
1. Percentage of your home used for
business.
One common method for figuring you
percentage is to divide the area used for business by the total
area of your home. So if your office is 200 square feet while
your home is 1000 square feet, then your home office is 20
percent of your home. Your business percentage is therefore 20
percent.
Another technique for calculating the percent use is to
divide the total number of rooms used for business by the total
number of rooms in your house. Note however, that you use this
technique if all your rooms are of the same size. So if you use
one room for your office in a 5-room house, then your business
percentage is 20 percent.
2. Deduction limits.
Here
comes the tricky part. The IRS allows full deduction of your
business expenses only if your gross income from your home
business equals or exceeds your business expenses (including
depreciation). If your business is not earning yet, or you are
operating at a loss, then your deduction for certain expenses is
limited and part of your home office deductions will not be
deducted this year. Any expenses you cannot deduct this
year due to this limitation can be carried forward to next year,
up to the point where they do not create a loss.
Filling up those tax returns, with full confidence that IRS
will not be behind your back sometimes requires help. Be sure to
consult your accountant or tax preparer to help you understand
the tax requirements.
Part
2: "What Qualifies for a Home Office Tax Deduction?"
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