STARTING A
HOME BUSINESS:
DEDUCTING THE BUSINESS
USE OF YOUR HOME
The federal
income tax deduction for the business
use of a home has a good
dollars-and-cents upside for those who
qualify. Some detailed questions have to
be answered correctly to get to that
point, however. Not surprisingly, the
IRS publication on the subject makes use
of a complex flowchart filled with "yes
or no" questions to guide taxpayers to a
determination of eligibility for the
deduction.
Qualifying
for the Deduction
To pass the
threshold for use of the home business
deduction, a taxpayer must satisfy the
following two basic sets of
requirements. The first set concerns the
nature of the business activities, while
the second set relates more to the place
itself.
First, the use
of the business part of the home must be
exclusive (with exceptions to be
discussed below), regular, and for the
business. Second, the business part of
the home must be one of the following:
the principal place of business--the
place where the taxpayer meets or deals
with patients, clients, or customers in
the normal course of business--or a
separate, detached structure used for
business.
The exclusive
use factor means that the area is used
only for business, not for a
mixture of business and personal uses.
However, the exclusive use requirement
need not be met when a part of the home
is used for storage of inventory or
product samples, or for a day-care
facility. When the IRS says that the use
of the home must be for a trade or
business, it does not mean any activity
that makes money for the taxpayer. If
you use a computer in your den for
day-trading of stocks or online
gambling, do not count on taking the
deduction. As for what constitutes a
"regular" use for business, that
essentially means business conducted on
a continuing basis, not occasionally.
Even if a taxpayer has a place in the
home used exclusively for business, the
deduction is not available if the
business activity is only sporadic.
As for the
requirements relating to the place
itself, the area in the home used for
business is a "principal place of
business" if it is used exclusively and
regularly for the administrative or
management activities of the business,
and there is no other fixed location
where substantial activities of that
kind are carried out. If some business
is transacted at more than one location,
determining whether the home location is
the principal place of business requires
consideration of the relative importance
of the activities at each location. If
that does not provide an answer, the
time spent at each site should be
considered. Remember that the deduction
is available if either the home is the
place for meeting with patients,
clients, or customers, or a separate
structure on the premises is dedicated
for business.
If the taxpayer
is an employee using part of a home for
business, the deduction is available if
all of the requirements described above
are met, plus two additional tests. The
business use must be for the convenience
of the employer (not just appropriate or
helpful), and the employee may not rent
all or part of the home to the employer
while using the rented portion to
perform services as an employee.
What Is
Deductible?
Deductible
expenses for a business use of the home
include items such as the business
portion of real estate taxes, deductible
mortgage interest, rent, casualty
losses, utilities, insurance,
depreciation, painting, and repairs.
This is not likely to be an
all-or-nothing proposition, though.
Generally, an expense is fully
deductible if it is direct, that is,
incurred only for the business part of
the home. An indirect expense, incurred
for running the home as a whole, is
deductible based on the percentage of
the home used for business. Any
reasonable method for determining that
percentage is acceptable, such as
dividing the square feet used for
business by the total square feet, or
dividing the number of rooms devoted to
business by the total number of rooms.
If an expense is unrelated to the
business part of the home, it is not
deductible at all.
If the
taxpayer's gross income from the
business use of the home is lower than
the total business expenses, the
deduction for certain expenses will be
limited. But those expenses that cannot
be deducted because of such a limitation
can be carried forward for the next
year's home business expenses.
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All legal articles in this site
are general and informative. The articles or any other information on this
site is not legal advice nor is any information warranted or guaranteed.
Laws change over time and in different localities and jurisdictions laws may
be different from any laws mentioned on this site. It is advisable that you
consult a attorney and or an accountant in the area where your business
will be located.
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Elias
Stassinos, Esquire
is a trademark and
incorporation attorney that has
helped thousands of small
business owners and entrepreneurs
launch their first business
enterprise. He's also an
entrepreneur who operates several
successful businesses not related to
his law practice.
Copyright
© E. Stassinos, Esq. 2005. All Rights Reserved.
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