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Home Business Tax Deductions

Posted by on August 30, 2012
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woman running a business from home

Running a business from your home can net you several valuable tax deductions.

The tax code makes several tax deductions available for people who run a home business. When taken advantage of, these deductions can significantly reduce the cost of running a business from your home.

The one thing you have to be hyper conscious of, however, is to keep your personal expenses and your business expenses separate. You cannot deduct living, or family expenses. Doing so will be a huge red flag for IRS auditors.

Working from home often blurs this line, especially when expenses are legitimately both personal and business-related. If this is the case, you can deduct the portion of the expense that was used for business.

Home office

You can claim a deduction for a home office. According to the IRS, a home office must meet two requirements:

  • You must regularly use part of your home exclusively for conducting business, and
  • You must show that you use your home as your principal place of business

If you do have a home office, you can deduct expenses related to the upkeep of your home/place of business, such as

  • rent
  • mortgage interest
  • insurance
  • utilities
  • repairs
  • depreciation, etc.

A home office doesn’t have to be an entire room – you can claim part of a room. Measure the area of your home office (as described by the two conditions above) and divide that area by the total area of your home. The resulting percentage is how much of your home-related business expenses you can claim.

Be aware that claiming the home office deduction may increase the likelihood that you are audited. If that’s the case, the burden of proof will be on you to demonstrate that your home office meets the two conditions. So if you’re claiming that your home office contains the only computer in the home of a multi-person family, the IRS is not likely to believe the office is used exclusively for business.

Office supplies

Regardless of whether you claim the home office deduction, you can claim a deduction for the business-related office supplies you purchase. Just be sure to save your receipts.

Office furniture

You can also deduct the cost of purchasing office furniture. When claiming this deduction, you can choose either to deduct 100% of the cost in the year that you purchased the furniture or deduct a percentage of the cost over the next seven years. This second option is known as depreciation.

Other equipment

The other business equipment you can claim includes computers, copiers, fax machines, scanners, etc. As with office furniture, you can either deduct the entire cost in the first year, or depreciate the cost of the next five.

Telephone charges

You can also deduct the cost of calls you make from home. Look at your phone bill and single out the business-related calls. Add them up and then deduct the expense when you prepare your taxes.

Keep these deductions in mind when you prepare taxes online.

Photo via Victor1558 on Flickr.

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