You shouldn’t decide whether to base your business in your home or outside of it, primarily on the tax advantages. But if you’ve made a commitment to start or grow your company from your living quarters -- even if only for the short term -- you’ll be happy to learn that a home business will give you tax advantages you wouldn’t enjoy otherwise.
Here’s advice about home business tax write-offs, and about other things you should do to maximize your tax situation while running your company from home.
Taking the home-office deduction
This is the big kahuna of decisions when it comes to home-based business write-offs. Even tax-accounting experts don’t agree on whether you should put in for it.
The deduction is for depreciation and operating costs for maintaining an office, workshop or other business site in the home. Figure out the square footage of that space and divide it by the home’s total livable space. You can typically deduct not only the business’s share of depreciation but also a share of your home’s overall utility costs.
Tax expert Eva Rosenberg suggests maximizing this deduction by figuring out what your utility bill would be if you didn’t work at home, rather than just deducting the percentage of utility expenses to match the percentage of physical space occupied by the office. The former deduction will be a lot higher, she says, because you might not be running the furnace at all, for example, if you worked outside your home.
But you’ve got to make absolutely sure that the space is solely dedicated to your business, or it doesn’t qualify for the deduction. “Even if you’ve just got a closet where you stuff your winter clothes, and it’s in the office that you’re wanting to deduct, you can’t do it,” says Felecia Dixson, a partner and CPA with Alfermann Gray & Co., in Rolla, Mo. “The IRS is very specific that the space you write off must be exclusively for business use.”
Another reason that some home business owners refrain from taking the deduction is that, if you’ve physically improved your home, you must subtract from the home’s new tax basis the amount of home-improvement cost that is proportional to the space that you claimed in the home-office deduction – get it?
“If you’ve never claimed the deduction, you can exempt the entire capital gain when you sell your house, and you’re in a completely ‘white’ area,” says Mark Amtower, owner of a business-to-government marketing company that he has operated for two decades out of his home in Highland, Md. “If you’ve claimed the home-office deduction, you’re in a gray area on this when you sell your house.”
Perhaps the biggest reason for steering clear is that the presence of a Form 8829 in a tax return, used to calculate the deduction, is widely considered a red flag for IRS auditors because many home-office owners abuse the provision.
Maximizing expense deductibility
You might be surprised how much of your day-to-day expenditures are deductible as business expenses, especially in the early going as you’re setting up your company and shelling out hundreds and perhaps thousands of dollars to outfit things. “You always underestimate what you spend in cash,” insists Rosenberg, who is based in Northridge, Calif.
On the other hand, a gigantic trap for home business owners is trying to deduct an entire expense as if it is attributable only to the business, when that just isn’t the case. For example, you may use your PC 12 hours a day for your company; but if your kids also use it in the evening to play video games, you should keep a log to detail the different uses, and you can deduct the percentage of time that you’re using the equipment.
Planning errands with taxes in mind
One way that IRS rules favor a home-based business is that you can deduct the expense of the first mile that you drive away from your house each day, whereas people who aren’t self-employed can’t deduct their commuting expenses. So take biggest advantage of this provision by stitching a business component into each trip even if you’re going to run some personal errands along the way.
“I have always had a post-office box and make sure that I fit as many stops along the way as I can when I go pick up my mail every day,” says Shel Horowitz, a Hadley, Mass.-based marketing consultant who has worked at home for a quarter-century.
Our Bottom Line
A home business offers plenty of lifestyle-related advantages, but it also benefits from some great tax write-off possibilities. Take the time to learn more about them and maximize your home-based business’s financial success.
As always, StartupNation highly recommends that you consult a professional tax accountant before taking any of these deductions or write-offs. StartupNation is not licensed to provide tax advice, and cannot make tax recommendations for individual small business owners .
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