Running a business out of your home has many advantages: no commute, you can dress how you want (well, most of the time), easy access to your kids, etc. One extra advantage of a sideline home-based business is that you often qualify for extra tax breaks.
When you use part of your home for business, you’re allowed to deduct a "pro-rata" share of expenses such as rent or mortgage payments, real estate taxes, security system, home insurance premiums, heat, water, electricity, air conditioning and depreciation. If your office space covers 500 square feet and your home is 2,000 square feet, 25 percent of your home expenses qualify. You can also deduct the pro-rata portion of any repairs or maintenance of your home that "benefit" your home office. Cosmetic upkeep — aluminum siding and landscaping, for example — are trickier.
Be aware that these deductions send up a red flag to the IRS. Don’t be scared off, just be prepared to justify, justify, justify the deductible portion of the cost. For added protection, file IRS Form 8829 with your tax return to explain why you need your home office and how it is used.
The amount you can deduct for home office expenses can’t be more than your business’s net income, after you’ve deducted your business expenses, like supplies, travel expenses and phone charges. For example, if you have $4,000 in deductions, you can deduct the entire amount, as long as your business had at least $4,000 in net profit. Home office expenses that exceed your net income can be carried over to succeeding years as a loss.
To qualify for these tax breaks, your home office must be the main place where your goods and services are provided to customers and your revenues are generated. You can maximize your tax breaks, and keep more of what you earn if you:
Use your home office exclusively for business. The IRS won’t let you take a deduction for your kitchen, just because you use the kitchen table as your desk. You must have a separate room or partitioned area that’s devoted to business use.
List your home address as your principal place of business, even if part of your business, like a warehouse, is outside your home. Make sure you have a desk, filing cabinet and separate phone line for your business.
Store your merchandise or supplies on your property — in a detached shed, spare closet or your garage — instead of renting a warehouse. You’ll save on rental costs and get a tax break for the space you use.
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