Tax Deductions
Here's how you can get the tax deductions you're entitled to
For some business owners, paying taxes can be a bitter pill to swallow.
But for those who have a solid bookkeeping system, a good certified
public accountant and a solid knowledge of tax law, tax time can be
less taxing.
To ready your home business for Uncle Sam, set up a detailed recordkeeping
system. Keep in mind that although you will operate your business from
home, the Internal Revenue Service will treat the part of your home
you use for business as a separate entity. Therefore you must separate
your business expenses from your home expenses.
To keep things in order, separate the receipts when you make the initial
purchase. If you are purchasing a household item and a business-related
item at the same time, tell the salesperson that you need a different
receipt for each.
Set up a separate business bank account. Keep all business receipts
in a separate drawer or filing cabinet. Use a computer program to track
and record your expenses and income. And hire a good tax advisor or
CPA to assist with the paperwork.
An accountant can help you set up your books and track your expenses,
pinpoint the types of deductions you can claim and help you fill out
the appropriate tax forms.
Like any business owner, you can claim deductions for such things as
office supplies, business travel, and meal and entertainment expenses.
But you can also file the "home office" deduction, which includes
such items as utilities and repairs. But before you file your return,
you must first qualify according to strict guidelines set by the IRS:
your office must be your principal place of business; a place where
you meet with customers or clients during the normal course of business
activity; or a separate structure that is detached from your home.
Moreover, your home office must be used "regularly and exclusively"
for business. That means that if you use a corner in your family room
to operate, but you also use the room to watch TV, you cannot claim
the deduction. However, there are a few exceptions to the "exclusive
use" rule. Contact your local IRS office for more information.
Once you qualify, you must calculate the amount of your deduction.
To figure the percentage of business use, use the "square footage"
or "rooms used" method. To use the square footage method,
divide the square footage of the space used for your business by the
total square footage of the house. The "rooms used" method
requires that you divide the number of rooms used for your business
by the total number of rooms in the house. Keep in mind all rooms must
be roughly the same size.
Here are a few more deductions you can obtain:
* Rent or mortgage interest. As a renter, you can deduct part of your
rent. If you are a home owner, you can deduct a portion of your real
estate taxes and qualified mortgage interest (but not principal) payments
on your home.
* Utilities. You can deduct the business percentage of payments you
make for utilities and general home services.
* Repairs and decorating. Costs that you incur for the benefit of your
business are considered "direct" home office expenses and
are fully deductible. For example, if you repair wood paneling in your
office, this expense is deductible. You can also deduct some "indirect"
home office expenses, such as repairing a leaky roof. But if these modifications
benefit only the personal-use part of your home, they are not deductible.
Over the past few years, the Internal Revenue Service (www.irs.gov)
has made it easier for taxpayers to take the proper home-office deduction
by having them file Form 8829, Expenses for Business Use of Your Home.
This way, filers can avoid fines and late penalties. For starters, Whether
they own their home or are using an apartment as a primary office space
to run a legitimate business, it is necessary for people to calculate
the square footage that they're using compared to the entire square
footage of the home. By doing so, they'll arrive at the proper percentage
of the home they can deduct. Once you have made this calculation, you
can deduct any direct and some indirect expenses related to the business
use of your home.
It is also advised that even if you're working a full-time job, you
can still be eligible for the same deductions for your home-based business.
You qualify as long as it's a legitimate business operated with the
intention to develop it into an income-producing business. It could
be that a person is working for someone else and trying to build adequate
income from their own business before giving up full-time employment.
We compiled these factors that the IRS uses to determine if a home
office can be deducted:
* Exclusive use: Make sure the space is not used for any nonbusiness
purposes, like serving as a part-time guestroom or a place for kids
to play computer games and check e-mail.
* Regular use: You must use the home office on a continuous basis,
not just occasionally, although there are some exceptions for seasonal
industries such as construction.
* Place of business: The space must be either your principal place
of business or the place you regularly meet with customers. If you conduct
the most important activities for the business (including administrative
functions) in your home office and spend most of your time there, you
may qualify for a deduction. Taking the home-office deduction doesn't
require that you only work at home, as with a plumber or salesperson.
* Separate structure: If you have a separate structure that is used
exclusively for your business, such as a house painter's shed, expenses
related to that structure may be deductible even if you don't have a
home office.
Since IRS rules are not crystal clear and each home setup is different,
seek a tax professional by getting a recommendation from someone you
trust. Take the deduction, but make sure you're entitled to it and make
sure it's done right.
Tax Deductions
