Tax Deductions for Home-Based Business Owners

Running a home-based business provides many benefits. The largest benefit for many Dads and Moms is the opportunity to be home with their children. However, financial benefits provided in the form of tax deductions that other businesses may not be able to claim, can help in the success of that business. Unfortunately, too many home-based business owners without previous business experience (as owner, not employee) end up over paying the government every year because they are unaware of the business deductions that are available.
If you are starting or planning a home-based business, now is the time to design a business environment that will fulfill your business needs and take full advantage of deductions. Setting up your business to maximize deductions and simplifying record keeping will contribute to lower taxes and “legal” use of deductions. Of course, the first thing to learn is what is and what is not deductible.
The following information assumes that your business is a start-up or young business and is completely home-based with no employees and you acting as sole proprietor. Another assumption is that you are not a manufacturer, i.e., you may sell widgets, but you do not make widgets in your home although you may store widgets in your home. Most probably, you are an internet service provider, consultant, writer, etc.
Home Office Deductions
As a home-based business, you have the deductions normal to the operation any business. If you were leasing an office, the rent and utilities (assuming you pay them separately) are legitimate deductions. The IRS allows you to treat your home-based office in much the same way. Except in this case, it includes the expenses of the office you maintain in an apartment, condominium, or house.
This can include a “portion” of rental cost for a home or apartment, that is, anything you spend to possess and maintain the “home” in which your office is located. If you own your home, this includes real estate taxes, mortgage interest, depreciation of the home, utilities, insurance, maintenance, repairs, trash removal, sewers, water, etc. All of which can add up to sizable deductions for a home-based business owner.
What is a Home Office?
The answer to this question provides the reason planning is important. Ideally, you have a separate room or other area convertible to home office use. This is crucial to deductions and, in terms of privacy and/or isolation, probably the success of your business. Legally, an actual “partition” of the area is not required but delineation of the area with at least a desk, computer, a book case/shelf, and a file cabinet for all those receipts is necessary.
Use common sense, if you are simply using a small area of a furnished quest room, game room, or family room it is difficult to claim the area as used solely as an office and not as a common area outside business hours. In addition, that little area is all you can claim and may not be worth the effort of making the deductions. Ideally, a full room or at least a physical partition for the workspace is preferable.
Home Office Deductions
The area you set up as an office will determine the “portion” of home expenses, write-off, applicable to your business deductions. For example, a 200 sq. ft. bedroom could easily accommodate a full desk, bookshelves, fax/copier, and an extra chair for a client. A sort of ideal den, but set aside for “business use” only. In a 1500 sq. ft. home, this is 15% of your home. This means that 15% of all the expenses of the home mentioned above, as well as repairs, are deductable.
For phones and the internet set up a separate account/line for the phone and a separate account/connection for the internet. Separate billing will simplify your records at tax time. All other expenses for your business are simply claimed business expenses according to the rules for any business. Besides consumables, do not forget software and web page costs. If you furnish the office (furniture, computer, fax, cell phone, etc.) through purchase or reassignment from home use, these expenses are deductible as start-up costs but require amortization.
Remember, if your business deductions far exceed your business income and your home office expenses contribute a significant part, it may appear that the business is a business in name only and a red flag to the IRS.