We all know continued layoffs, closings, downsizing and mergers have resulted in home based businesses being grown at a phenomenal rate. However, did you know that home businesses can be great tax shelters?
Home based business people are very often focused on successfully starting the business and generating sufficient profits, initially. So it's not until the first tax season rolls around that they realize there are deductions that can reduce gross income and thereby can reduce your tax payable.
Unfortunately failure to keep some valuable receipts or other supporting documents, results in many of them being unprepared to maximize the benefits of those deductions. Be sure to keep accurate records of all your expenses, which will later provide the basis of information needed to figure your deductions for the business use of your home. You should keep receipts, bills, cancelled checks, credit card statements, and other evidence of expenses you paid. The IRS requires you to keep these records as long as they are important for any tax law, which is usually 3 years from the date your taxes are filed.
As a home based business owner you may deduct a portion of the following business expenses, which are directly related to your house.
* Interest expense on the mortgage of the residence
* Rent, if you don't pay a mortgage
* Security system
* Utilities and services including natural gas, electricity and water
* Real estate taxes
* Depreciation, if you do depreciate your home
As you can see utilizing your home to administer your business can be highly beneficial. However this will be only possible if you qualify for such deductions. In order to qualify you must meet the IRS requirements found in IRS publication 587. Some of the guidelines derived from IRS publication are as follows;
* You do not have any other permanent office location outside the home where you conduct business activities.
* The specific area defined in your house as your office, must be used for business purposes only. So you cannot use it for other purposes such as family events, etc. Further, you must use the office on a regular basis to conduct administration and management activities of the business such as bookkeeping, billing of customers, ordering supplies and writing reports.
* Make sure that use of any space in your business office area is associated with the business, and used as storage on a regular basis. Use the space exclusively and regularly as a place where you meet or deal with customers.
Now, for the time being let us assume that you manage to qualify for these deductions. Keep in mind that you will only be able to deduct a portion of the total expenses. Why?
The logic is simple, you don't exactly use the whole house for your business. As a result you need to determine how much of your house is actually used for business purposes. For example let's say you decided to start a Tax Consultation Service and you do all your work at your home office. Assume your house is 1250 sq feet and your home office is 200 sq feet. That's 16% of the total area of the house (200 sq feet / 1250 sq feet). Thus, you can deduct 16% of all the above mentioned valid expenses on your tax return. For instance if your annual rent was $30,000, you would be able to deduct 16% of it (i.e. $4800) from your taxable income.
So far we have looked at this topic from a general perspective. Therefore, it is strongly recommended that you access the IRS publications noted above and go through them in detail. It includes many more exceptions and detailed requirements you need to consider before taking the home business deduction. Further, it is also advisable to get the consultation of a tax specialist in case of complicated scenarios specific to your business.
Title: Tax Breaks for Home Businesses
By: Bizymoms.com Management
Summary: Owning a home based business can be an excellent tax shelter, but you have to follow the rules. This article looks at the ups and downs of claiming your home business as a tax deduction to the IRS.
Bio: Bizymoms.com has been dedicated to helping moms work from home for over 10 years. In 2008, Bizymoms is expanding their knowledgebase to include many other topics of interest to moms in their daily life. Bookmark us and check back often!