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Finances & Money

Using Your Home-Based Business to Lower Your Tax Bill

A Tax Tip from the Experts at JKLasser.com

A home office can mean the end of stressful commutes and bad hair days. A home office also can deliver a bigger tax refund. Your home office deduction is in reach if you follow the rules and keep the proper records. While it used to be a big red flag, taking a home office is no longer like wearing the scarlet letter of a tax cheat. Relax and don’t be afraid to get the most tax savings from your home and business.

When you use part of your home for business, you may be able to deduct expenses for the “business use of your home”. If you meet the requirements of the tax law, you should be able to deduct a percentage of many of the costs of running your home, such as: utilities, rent, insurance, depreciation, mortgage interest, real estate taxes, and some casualty losses, repairs, and improvements (as they relate to the part of the house you use for business).

Requirement #1: Regular and Exclusive Use

You must regularly use part of your home exclusively for a trade or business. There are two exceptions to the exclusive use rule:

  1. You don’t have to meet the exclusive use test if you use part of your home to store inventory or product samples, or
  2. if you run a qualified day care facility at your home

Requirement #2: Principal Place of Business

You must also be able to show that you use your home as your principal place of business.

  • A home office is your principal place of business, meaning you do most of the work that earns your keep there. This is no problem for people like freelance writers and accountants.
  • A home office qualifies as your principal place of business (meaning it’s deductible) if you use it for administrative and management activities — provided that you don’t use some other fixed location to do these chores. This rule saves the day for independent salespeople, construction contractors, plumbers, veterinarians, computer consultants and the like, who make their dough out in the field but do their paperwork at home.
  • A home office can also qualify if you use the office to meet with clients. Even if you do most of your work elsewhere, as long as you regularly use your home office for meetings.

Ordinary business expenses are deductible even if you don’t qualify for the home office deduction. If you don’t meet the rules above, you can still deduct ordinary and necessary business expenses that you incur at home — for instance, long-distance phone calls, a separate business telephone line, and the cost of office supplies and equipment.

How to Claim the Home Office Deduction

If you qualify for the home office deduction, you must figure the amount of your deduction on IRS Form 8829, Expenses for Business Use of Your Home (2007). Then you enter the total amount of the deduction on Schedule C, Profit or Loss from Business (2007). Attach both Form 8829 and Schedule C to your Form 1040 tax return.

Be ready to prove to the IRS that you are entitled to take the home office deduction.

  • Photograph your home office and draw a diagram showing the location of the office in your home. Keep this information in your tax folder.
  • Get a separate business phone line.
  • Have clients or customers visit your home office — and keep a log of those visits.
  • Keep track of the time you spend working at home.

For more on what can work for you, against you, and how to do better this year, go to our new subscriber-based web service at www.jklasser.com.

About the author

Clever Dude

6 Comments

  • Some good advise here. Too often we forget about taxes until the very last minute, when it should be a part of our ongoing business plan.

    Lewis

  • A home office definitely does save money, particularly during the start-up phase of any business. I work specifically with small business computer consultants, and I often run into a lot that start this way because of the low (and really nonexistent) overhead as well as the opportunity to work very flexibly. The only advice I typically give is that – while you can get a great deal of flexibility from a home office and save a lot of money – you need to make sure to set it up professionally (and I agree – keeping track of your time, etc. is one of the ways to ensure a professional environment!). For example, you should never use your home phone line as a main office number and you should really invest in high speed Internet access, a separate phone line, a business cell phone and other elements that any other business would have. Thanks for the tax tips! Very well timed, considering the time of year!

  • Your post is really interesting… And your thoughts are great.
    The best rule of thumb to choose a business for you to pursue at home is to select the one you would like or would use. When you like something it is very sure that you will be thrilled or very
    enthusiastic about it.

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