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Tax Advantages of the Home-Based Businesses

Aug 17, 2007
Owning and operating a home based business has many advantages and benefits over working at a regular 9-5 job. There is always the simple pleasure of just being at home in addition to the above average income the self employed usually bring in. One consideration that you may not have fully explored is the qualifying deductions you can make on your tax return.

Home Office Deduction

Your office at home and related expenses are allowed deductions according to IRS guidelines. To qualify, your home must be the primary place where your business is conducted. Additionally, the office space must be used exclusively for your business. It is best to have a room that is obviously equipped for business use only. Should a question arise, there must not be any doubt that the room is used for other purposes. Needless to say, keep the day bed in another room.Details of what qualifies as a home office and what can be deducted is explained more fully in various IRS publications found on their website at www.irs.gov

Home Office Building Expenses

You can deduct home office improvements and repairs. So, if you were to paint your home office, it is considered an expense associated with conducting business from your home and it is deductible.You can also deduct mortgage interest as a percentage of the full mortgage paid on your home. Lets say if your home office takes up 100 square feet of your 1,000 square foot home, you could deduct up to 10% of the interest on your home mortgage as a business expense. This also applies to those who rent. Property taxes paid for your home also qualify at the same percentage rate as the mortgage. Home owners can also depreciate a percentage of the home over 39 years. Home expenses that are not related to your business cannot be deducted.

Utilities

Using the same percentages, you can also write off utilities such as electrical, gas, etcetera.

Phones and Communications

The IRS considers the first phone line in your home to be personal. Additional lines for business use including a cell phone are tax deductible. Internet service fees are deductible as a percentage depending on its business use.

Security

A percentage of the secured home area and its security costs are deductible as a business cost.

Moving Expenses

Form 8829 titled Expenses for the Business Use of Your Home is where you would claim moving expenses related to your business. Again, if 25% of your belongings were business items, that percentage can be written off as a business expense. Unfortunately, a C corporation cannot claim this deduction.

Software

Any software that you purchase for business use can be deducted. You will probably be required to write off over a period of time programs that are over $500 in value though. Check with IRS guidelines for further information.

Insurance

The premium you pay on your home owner's insurance is partially deductible. Any insurance that covers your business specifically can be deducted as a cost of doing business. An incurred loss not covered by insurance can be deducted fully or partially depending on its' use.

Tax Preparation Expenses

You might be able to deduct the cost of having your taxes prepared even though it may not be specifically about your home based business. Any software that you purchase to help you prepare your taxes for your business may also be deductible.

Retirement Account

Contributions to a self employed retirement account may also help reduce your tax liability. Inquire with a qualified specialist like a CPA to determine current laws regarding this special benefit.

Educational Expenses

Any monies spent on learning skills that are specific to your home business are usually tax deductible. If you purchase a course in gift basket making for example as a precept to starting your gift basket home business, that would be tax deductible.

Transportation

You can write off transportation expenses related to your business. Traveling to and from a clients place of business, for example, would qualify. The IRS allowed 37.5 cents per mile for the 2004 tax year. You must keep detailed records though. A journal kept in your car with odometer readings should suffice.

Meals and Entertainment

If you entertain while conducting business even if it just over a meal it is deductible. While you can only deduct 50% of the cost of meals and entertainment, it is well worth keeping records. Additionally, you can deduct your meals if you are conducting business out of town. Please remember to stay within IRS guidelines to avoid awkward questions later.

Summary

Most home businesses do not take all the deductions that they are legally entitled to mainly because the idea of an audit is so fear invoking. Just stay within the IRS guidelines, keep receipts and accurate records. If you have any questions or doubts, call and ask the IRS. You can also consult with a tax preparer to help you discover, implement, and plan on what deductions you can legally take.

Remember, tax deductions are a way to foster the growth of your business. Take advantage of your legal right to legally minimize your tax liability, your home based business will be glad you did.
About the Author
Robert Williams is the Editor of Work At Home Business Website. WAHBWS is an information portal for those seeking to generate an income from home. Work At Home Business Website. Robert also promotes his own home business opportunityPrepare4Success.com
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