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Home Based Business Deductions Worth a Close Look

Financial Planning

February, 2011

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Home Based Business Deductions Worth a Close Look

Did you know that more than half of all U.S. businesses are home based? These business owners are sometimes referred to as homepreneurs. Mary Kay Cosmetics and even Ford Motor Company were once businesses based at home. This no longer conjures up the image of an unshaven man in pajamas sipping coffee in front of his laptop. These business people are real players in the world of commerce today.

While working from home has distinct advantages, it also has real headaches. You must have excellent management skills and be able to separate your home and work environments. Even with all its challenges, there is much to be said for making your own business decisions. If you run a home business, you must be prepared to take advantage of every tax deduction available at tax time.

Your home itself will be one of your most important deductions. The home office deduction applies if you use part of your home regularly and exclusively as your principal place of business or to meet with clients. You can also claim an unattached separate structure if it is used in connection with your business. Separate rules apply for home daycares. The definition of home can also be extended to include apartments, mobile homes, condominiums and even boats. The amount you can deduct will depend on your gross income and total business expenses. But be careful, because definitions in this part of the tax code can be tricky. Plan to consult a professional before claiming the deduction.

Are you traveling in your personal vehicle to meet with your clients? If so, you might be able to claim a portion of the vehicle expense basis as a business expense. You will need to keep track of your business mileage separately from personal use of the vehicle to claim this deduction. The IRS allows you to use either standard mileage rates or actual expenses in determining the deduction.

Do you pay your own health insurance? If so and you or your spouse are not eligible for employer-subsidized insurance, you might be able to claim the deduction on your federal income tax return. To claim it, you must be self-employed and have a net profit for the tax year.

Other deductible expenses might include a portion of real estate taxes, rent, utilities, mortgage interest, repairs and maintenance. Don't get too carried away with the maintenance expenses, though – items such as painting a room or mowing the lawn are not deductible.

You must provide documentation for all expenses you are claiming for your home based business, including the square footage portion of your home used for this purpose.

Generally, you should keep these records for a minimum of three years after the date you file the return. You must also be able to prove your home's depreciation. To do so, show the date of purchase, purchase price and any improvements made. Be sure to exclude the land value in computing the depreciation expense.

Scheduling a visit with your CPA can help reduce your record-keeping worries. He or she will be able to provide essential information to you such as specific records you must keep, what tax forms must be filed and the methods you should use to keep track of income and expenses.

With this headache out of the way, you can slip back into those pajamas, pour yourself a cup of coffee and enjoy running your business from your own home.

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These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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