Tax Deduction for Small Business Owners

 

   Entrepreneurs who work from home could save a lot on their taxes by trying the home office deduction. They just have to meet IRS requirements. Some people use their home as a work space and he IRS can accomodate for this. You can write off rent, utilities, repairs, maintenance, and real estate expenses. Find out how you can qualify. Both renters and owners can do this. Hotels aren't allowed but you can use apartment, home, boathouse, or condo.

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   Home office deduction rules apply to freestanding structures as well. Different structures you can use include a studio, garage or barn space as your home office. Just be sure the structure meets the “exclusive and regular use” requirements. The space you’re using has to be exclusively used for conducting business. Using a spare bedroom as both your office and a playroom for your children will cause you to be inelligable. If you provide day care services for children, elderly (65 or older) or handicapped individuals in a certain part of your house, you can claim business deductions, as long as you have a license, certification or approval as a day care center under state law, according to the IRS. Another exception is if you use a space for storage of inventory or products.

    Your home office doesn’t have to be the only place you meet clients or customers, it must be your principal place of business. Be sure to use the space exclusively and regularly for administrative or management activities.

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    With the simplified option, you aren’t deducting actual expenses. Instead, the square footage of your space is multiplied by a prescribed rate. The rate is $5 per square foot for up to 300 square feet of space.

• The regular, more difficult method values your home office by measuring actual expenditures against your overall residence expenses. You can deduct mortgage interest, taxes, maintenance

Things to watch out for

• Receipts. If you plan on deducting actual expenses, keep detailed records of all the business expenses you think you’ll deduct, such as receipts for equipment purchases, electric bills, utility bills and repairs. If you’re ever audited by the IRS, you’ll be prepared to back up your claims.

• Anxiety. Don’t let the fear of an audit keep you from taking the home office deduction.

• Home sales. If you're a homeowner and you take the home office deduction using the actual-expenses method, it could cancel out your ability to avoid capital gains tax when selling your primary residence. People who sell their primary residence after having lived in it for at least two of the five years before the sale generally don't have to pay taxes on up to $250,000 in profit on the sale, or $500,000 if married filing jointly, according to IRS Publication 523.

• Depreciation. If you use the actual-expenses method, you’re required to depreciate the value of your home. Depreciation refers to an income tax deduction that lets taxpayers recover the costs of property, due to wear and tear, deterioration or obsolescence of the property, according to the IRS. The depreciation you’re required to take in home office deductions is subject to capital gains tax when you sell your home. For example, if you own your home, use 20% of it as a home office and deduct depreciation, 20% of your profit on the home’s sale may be subject to capital gains tax. However, if you use the simplified method, depreciation isn't a factor and you may not be subject to the tax.

The rules on tax deductions for a home office can be hard to digest. Consult with a tax advisor or use the appropriate online tax software if you're unsure about how to proceed.

ON A SIMILAR NOTE...

 

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