Home Office Tax Benefits:
Maximize your profits

Tax benefits are one of the many reasons to create a home office. You can realize savings on you taxes that can make having a home office worthwhile even if you are not earning a lot of money.

The first step in realizing the earning possibilities of your Home Office is obvious; you must work and function as a office. Fail to do so and you can never attain the potential profits available.

Establishing a Home Office is simple, you need to do only three things for the IRS to recognize you as a legitimate business:

  1. Name your business. Simple is better than complex for a variety of reasons, but your business name is entirely your choice.

  2. Open a separate checking account and use it exclusively for business transactions. One way to keep this separate from your personal accounts is to use a different bank, thereby avoiding inadvertent mixing of business with personal money.

  3. Maintain reliable records. Business records are for you; but good records are invaluable to you on many levels, including dealing with the IRS.

Maintaining your Home Office vis-à-vis income and expense records is absolute. Without proper documentation items may be difficult to prove as business related; good record keeping assures their validity. It cannot be overly stressed; maintain scrupulous, accurate, and clear records.

  • Income Records: All business related money received should be deposited in your bank account. An accounting ledger, hand or computer generated, should list these deposits and be kept in balance

  • Expense Records: Business expenditures will generally consist of several references; a purchase receipt and an entry in your checking account. You may also want to keep a daily logbook. The IRS recognizes business expenses as anything necessary and ordinary for the proper running of your business.

    • Necessary expenses are those relating directly to and essential for your business. A copier is necessary if you make copies for customers, therefore a deductible expense. A yacht, without extraordinary proof of its necessity, is neither necessary nor deductible.

    • Ordinary expenses are items needed to conduct everyday business; office supplies, chair, stamps, paper, and so on. A list of ordinary expenses is long and varies from business to business. Your business may never use a paper clip; another might use a box a week.

There are expenses particular to a Home Business: You are working from your own home as an independent, self employed, sole proprietor, and therefore have certain deductions unavailable to store front businesses.

  • Home Office Deduction –You need a place to conduct business. Somewhere in your house, designate a space as your business office. It can be as simple as an unused location in a hallway or an unused bedroom. It should include space to keep everything necessary for your particular needs; desk, chair, files, and so on. With this done, a portion of your house becomes a benefit as you can deduct all expenses related to this office space as a legitimate business expense. If your house is 2000 square feet and your office is 200 square feet, you are entitled to deduct 10% (2000/200=10) of most home related expenses (mortgage, electricity, heating, repairs, etc) as business expenditures.

  • Car Expense Deduction – when you use your automobile to conduct business; pick up office supplies, meet a potential customer, travel to a business seminar, and so on, you can deduct mileage related to that trip. You must keep a record of the miles traveled and at the end of the year subtract business miles from personal miles for the vehicle involved to determine your deductible mileage. If you traveled 10,000 miles and 2000 of those were for business purposes, you can deduct 20% of the actual auto expenses as a business deduction, or as an alternative, use the IRS standard mileage rate – business mileage percentage multiplied by the standard rate.

  • Other Deductions – there are other Home Business expenses that are beyond the scope of this article. As you conduct Business, they will be recognized if applicable.

Reporting to the IRS is done on Schedule C, Profit and Loss from Business; Schedule SE, Self Employment Tax, and Form 8349, Home Office Deductions. Obtain copies of these and review their content; you will gain insights into what is expected when it is time to fill them out.

At first glance they may be intimidating, but they are not difficult. Other Schedules and Forms may be necessary according to the needs of your particular business. IRS Publication 334, “Tax guide for Small Businesses” is available from the IRS.

A brief aside on accounting and reporting to the IRS: Millions of people and businesses have successfully used hand kept ledgers for centuries; some still do. However, there are computer programs available that do this effortlessly and mistake free.

They are invaluable tools for Home Business owners in maintaining income and expense records (their cost is small and deductible!)

On the same subject; when preparing and reporting taxes, consider a tax computation program. Such software guides you through the various tax forms/schedules/etc with a minimum of work; calculations are automatic and the results error free.

Accuracy and simplicity are the key words to all of the above; none of it is difficult. Use the benefits of the system to your advantage and realize the maximum profit potentials from your Home Business. As someone once said, “Its y’all’s money, y’all oughta be able to keep it”

Now that you have maximized your profits, remember the old adage: Don’t spend it all in one place!

[Click Here] to view more information from the IRS and access the many forms mentioned above.

[Click Here] to view self employed FAQ's from the IRS.


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