Home-based Business Tax Breaks
Some weeks ago I wrote about the advantages of setting up a home-based business to pursue your entrepreneurial goals – no commute, you can dress however you want (most of the time); you can spend more time with your children and etc. This week I want to revisit the subject and highlight some tax advantages of a home-based business.
Using part of your home for business will qualify you to deduct numerous expenses such as rent or mortgage payments, real estate taxes, security system, home insurance premiums, utilities and property depreciation. Not to mention, you can also deduct any repairs or maintenance of your home that may benefit your home office.
The deducted costs must be a pro-rata share based on how much square feet of your home is being used for business. For example, if your office or work space covers 500 square feet and your home is 2,000 square feet, then 25% of your home expenses qualify.
Another hurdle to qualifying for these tax breaks – your home office must be the main place where your goods and services are provided to customers. Here are some helpful tips to keep in mind.
- Use your home office exclusively for business. You will not be able to take a deduction for your kitchen simply because you use the kitchen counter as a desk or production area. It’s important that you have a separate room for your home office or work area designated to business use only.
- Be sure to list your home address as your principal place of business, even if departments of your business are located outside your home, such as warehouse.
- Also make sure you have a desk, filing cabinet and separate phone line for your business.
- You can also store your merchandise or product supplies at your home instead of leasing or acquiring a warehouse – preferably in a detached shed, so you can spare your closet or garage. Not only will you save on rental costs, but you can receive a tax break for the space.
- The amount you can deduct for home office expenses cannot exceed the business’s net income, which is the income remaining after you subtract variable and fixed business expenses. Home office expenses that may exceed your business’s net income can be carried over to succeeding years as a loss.
Be aware that home office expenses often send up a red flag to the IRS, but don’t be fearful, just be prepared to appropriately justify the deductible portion of the cost. Always maintain great records.
In addition, I always encourage new entrepreneurs to seek professional tax advice, simply because certain situations may be different. A talented accountant can help you clearly understand the tax code, along with opportunities available to you and provide strategic direction on the best way to properly take advantage of any deductions.
If you’re starting a new business or wanting to grow an existing one, then I’d love to hear from you.