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
Establishing a Home Office is simple, you need to do only three
things for the IRS to recognize you as a legitimate business:
- Name your business. Simple is better than complex for a
variety of reasons, but your business name is entirely your
- 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.
- 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
- 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!
to view more information from the IRS and access the many forms mentioned above.
to view self employed FAQ's from the IRS.
Click here to read about a home office opportunity!