In the previous post, "Home-Based Business", I spoke a little about the deductions that can be used relating to your business taxes. I will dive a little deeper in this one. The more you know, the more you can grow!
Failure to qualify for the home deduction doesn't prohibit you from operating your business out of your home. It only means that one possibly large expense, the cost of the space itself, is not deductible on your federal income taxes. You can still deduct all legitimate business expenses other than those directly related to the business space. The "Home Expense" rules apply to sole proprietors, spousal partnerships, and one owner LLs. Partnerships, corporations, and multi-owner LLCs may be able to claim a home expense deduction on several factors that were covered in the previous posts.
TAKING THE HOME DEDUCTION:
There are two options for taking a home deduction: You can deduct actual expenses, or you can take a standard flat rate deduction.
Deducting actual expenses involves keeping detailed records of expenses, making multiple calculations, filing an additional tax form (Form 8829, Expenses for Business Use of Your Home), and, if it is a home you own, possible tax problems when you sell the home. By comparison, the flat rate deduction (the IRS calls it the Safe Harbor Method) is simple to figure, does not require Form 8829, and eliminates any tax complications when you sell your home.
Although the flat rate deduction is much easier to calculate and requires much less paperwork than using actual expenses, it probably will result in a lower deduction amount. Also, if your business is showing a loss, the flat rate deduction has some limitations. You can calculate the home deduction both ways and then decide which will give you the biggest deduction and the fewest hassles. Once you select a method, you are not stuck with it for future years. You can use one method one year, and the other method the next year if you want.
In the above sample floor plan a couple have businesses that are separate and therefore they can either use the flat rate deduction for the first floor living space that's converted into an office for one business usage as well as the second floor bedroom that's converted into an office for the second business usage.
May is "Small Business Month" and it's always great to do business with other businesses as well as customers. Many times small business owners can be unclear about many expects of the administrative and legal processes that need to be considered when starting their business as well as during the time or operating it. I enjoy learning and broadening my knowledge of various subjects. I have physical, electronic, and audio libraries to prove it.
Do you know...as far as the IRS is concerned, a home-based business is no different than any other business. Home business owners file business tax returns, report the earnings as business income, and deduct business expenses. The expenses that home-based businesses can deduct are exactly the same as the expenses every other business can deduct, with one important exception: the home itself.
If you use part of your home for business--your office, workshop, store, warehouse, or whatever you are using your home for--the cost of the space (the rent or, if you own your home, the depreciation) and some of the expenses directly related to the space, such as utilities and maintenance, can be deducted only if the space meets special IRS requirements. The two basic rules are (1) a principal place of business, and (2) regular and exclusive use.
So the message is: "Don't worry about the IRS. Deduct everything you are entitled to."
There is one other tax deduction, in addition to the home expense deduction, that is limited for home-based businesses. The cost of a land-line telephone into the home CANNOT, in some cases, be deducted. It's a little law that's slowly becoming obsolete as more and more businesses are switching to cell phones, smartphones, and internet connections, which do not come under this land-line law.
Other business use of the home: The Home Expenses deduction applies not just to businesses that are home based but also to any business where the owner of the business uses his or her home for business purposes. Many mobile businesses--businesses that travel to customers--quality for the home expenses deduction. Contractors, salespeople, entertainers, freelancers, consultants, and others who earn income outside the home may be eligible for the home expenses deduction. Even businesses that have separate business locations outside the home may be eligible for the deduction. All IRS rules for deducting home expenses are explained under the Home Expenses post next.