Tax Tips for Home-Based Business Owners

The old year has ended, and the New Year has just begun. The clock continues to tick…tax time is almost here again! Whether you own your own business or work for someone else, it’s time to get out those receipts and financial records and figure out just how much you’re going to owe the government in taxes. Well, if you’ve kept good records and been tax-sensitive all year long, you may not find yourself getting a healthy refund. And if you work from home, of course you’ll want to take advantage of all of the deductions that the IRS makes available to you.

Do you make your living online? If so, you probably work from home; most online entrepreneurs do. Having a home-based business makes some very significant tax advantages available to you. However, you must play by the IRS’ rules. For example, if you have an office in your home, that area must be used ‘exclusively and regularly’ for the operation of your business. It must also be your ‘principle place of business’; in other words, you don’t have a workplace anywhere else that you can operate your business from. You can’t use the space for family or personal functions, unless you’re going to divide up the time according to how the area is used. If you use your home office for business purposes only sixty percent of the time and the other forty percent is devoted to family life, then you’ll have to prorate the home-office deduction that you’re entitled to.

Because you have a home office, you’ll be able to deduct many of the costs associated with the upkeep of your home. Expenses such as mortgage and property tax payments (or rent if you’re not a homeowner), insurance costs, utility bills and even internet service (if it’s used in your business) can all be legally deducted. Of course, you’ll only be able to deduct the amount of those costs that apply to your specific home office area. For instance, if your office area is ten percent of the total square footage of your home, then you can deduct ten percent of your mortgage payment. That percentage will apply to the rest of your home maintenance costs, as long as those costs have an actual bearing on your office. However, if you end up with enough home office deductions to show a net loss during the tax year, you won’t be able to take that loss. If your business made $70,000 for the year and you have $75,000 of home business deductions, the IRS will let you show a net gain of zero. But you’ll be able to carry the other $5,000 in losses forward to next year’s taxes to reduce the amount you may owe then.

Don’t forget that you can deduct all of your other business expenses as well. If you own a website, that will include the costs of web hosting, site development and maintenance, and owning your domain name. If you bought a new computer system for you business, you can even deduct the full amount (up to $108,000 of personal property, as a matter of fact) on this year’s taxes instead of having to depreciate it over a number of years, as in times past. That falls under the Section 179 deduction.

You’ll need Form 1040 Schedule C and Form 8829 to calculate and report your home business deductions. They, along with other forms, tools, and helpful information are available on the IRS’ website. Study the information, stay abreast of everything that’s available to you, and by all means get help from a competent tax professional if you need it. It’ll be good for your bottom line.