While April is still a few months away, now’s the time to start thinking of taxes. Start looking for all the receipts and documentation and start researching on what possible deductions you can get.
If you are running your business from your home, you may be able to deduct the expenses associated with running the business. Our article “Tax Time: Check What You Can Deduct from Your Home Office” explains what you can deduct from the business use of your home.it
While taking home business deductions can lower your tax liability, it is important to be careful about what you deduct and make sure that you follow the stipulations of the IRS. To qualify for home business deductions, you must pass the following test stipulated by the IRS:
- Exclusive Use – that part of your home must beset aside exclusively for the business.
- Regular Use – the place must be regularly used for business
- Trade or Business Use – Your principal place of business for any trade or business in which you engage;
- Principal Place of Business
- Place To Meet Patients, Clients, or Customers — As a place to meet and deal with clients or customers in the normalcourse of your business
- Separate Structure – In connection with your trade or business if you are using a separate structure that is not attached to your home or residence (e.g. a studio, garage, or barn).
Following all these requirements is critical, lest you attract IRS attention and audit you. A few days ago, someone over at Yahoo Answers asked if he could deduct their pool because his wife who runs an unlicensed daycare from their home uses the pool with the kids she watches. That definitely won’t fly with the exclusivity test as it can be hard to argue that the pool is used exclusively for the business and not used by the family including their own kids.
Taking careful scrutiny of what you claim as home business deduction becomes more important with the news that IRS will focus more on small and home based businesses this year. Tennessean.com even reports that “Nationally, small-business audits of all types increased 22 percent between 2001 and 2005.” Hopefully, that won’t include you or me.
Read the article “Home Business Tax Deductions: What to Watch Out For” to learn the things that you need to carefully check when using home business tax deductions.