Home Office Tax Tips

Home Office Tax Tips

If you have a home based business, eBay, or online business, one of your biggest tax deductions may be your home office.  Here are some tax tips to help you get the most out of your home office.

Qualifying for the home office tax deduction:

Your home office qualifies for the home office tax deduction if it is your principal place of business, and you use it regularly and exclusively for business.

To pass the ‘place of business’ test, your home office must be the principal place you conduct your business, or a place where you regularly meet with clients or customers, or it must be a separate structure not attached to your home.

Regular and exclusive use means that you spend at least 10-12 hours per week conducting business in your home office, and that you don’t use this room for other purposes.  For example, if you use part of the room as a laundry room or children’s play room you may not qualify for the home office deduction.

Continue Reading Home Office Tax Tips

Subscribe to EbizTaxTips.com

Attn: Online Business Owners! Do you want to learn how to minimize your online business taxes?

My free report '5 Tax Saving Tips for Ebiz Owners' includes tips to help you get all the deductions and credits you're entitled to, so you don't overpay Uncle Sam!

Why you should deduct your home office

I frequently hear from small and home based business owners that they don’t take the home office deduction because they are afraid of being audited.

The home office deduction has been labeled as a red flag for years, but I think this deduction has too many benefits to just ignore it.

Robert Flach of The Flach Report agrees with me.  In his post "Three Cheers for the Home Office Deduction" Robert tells us why the home office deduction is great:

 1. It moves part of a deduction that would have been claimed on
Schedule A (real estate taxes and mortgage interest) to Schedule C and
as a result reduces your Adjusted Gross Income (AGI). While
a home office cannot generally be used to create a loss on Schedule C,
you can generate a net loss to the extent of the business use
percentage of real estate taxes and qualified mortgage interest. A home
office deduction in general will reduce your AGI, and reducing your AGI
can increase a whole laundry list of deductions and credits. See my
WANDERING TAX PRO post on “The Most Important Number on Your Tax Return”.

2. It reduces not only your federal and state income tax but also your self-employment tax. The home office deduction could provide 40% to 50% in total tax savings!

3. And, perhaps most important, it establishes your home as a place of
business for the purpose of deducting business mileage. You have no
“commuting”. Every time you leave your home to drive to another business location (a client, the office supply store, your business bank) you have deductible round-trip business mileage.

You no longer have to be afraid of claiming a home office
deduction. I do not believe that it raises the same “red flag” with the
IRS that it did in the 1980s and most of the 1990s. And you no longer have to pay tax on the business use percentage of the gain when you sell your residence.
All you have to do is “recapture” the depreciation claimed after May 6,
1997. Prior to 1997, if you had a $100,000 net gain on the sale of your
residence and you used 10% of the building as a deductible home office
you would have to pay tax on $10,000 plus the total amount of
depreciation claimed on the home office over the years.

 

Top 5 Missed Business Tax Deductions

I spoke about tax tips for small business owners at a seminar this past weekend, and one of the questions I got was ‘what are the top missed business deductions?’

This is a great question, so here goes…

1.  Automobile expenses – if you use your car for business, you can deduct a portion of your car expenses.  You can either keep track of and deduct your (business related) actual expenses, or you can keep track of your business miles and use the standard mileage rate (48.5 cents per mile in 2007).

2.  Startup expenses – business expenses incurred before you actually start the business used to have to be depreciated over 5 years.  Starting after October 22, 2004, you can now deduct up to $5,000 of startup expenses in the first year of business.  Startup expenses over $5,000 still have to be depreciated (over 15 years).  Startup expenses include advertising, hiring employees, purchasing equipment, supplies and more.

3.  Education expenses – you can deduct the cost of classes, seminars and other education costs if they are related to your current business.

4.  Travel – when you travel for business, you can deduct the cost of the airfare, taxis, hotel, meals, and other travel related expenses.  If part of your trip is for personal reasons, you may need to prorate part of the expenses.  Also, if you bring your family along, only your own expenses are deductible.

5.  Home office expense – many people choose not to take this deduction because it is considered a red flag.  If you have a legitimate home office, then you should not miss out on this deduction just because someone says it could be a red flag (being self employed is a red flag, but you wouldn’t not go into business because someone says you’re more likely to get audited as a small business owner, would you?).  Home office expenses include mortgage interest, real estate taxes, home owners insurance, utilities, and security alarm.  You can only deduct the portion that represents your home office, but this can be a substantial deduction for many home based business owners.