Many entrepreneurs are using their home as their primary place of business and may be missing out on some tax deductions, provided their home office meets the test for business use of the home.
In general, expenses pertaining to the portion of the home used exclusively for conducting business can be deducted as a business expense on tax returns. There are a few simple ways to determine if your home business meets the test for the Internal Revenue Service.
There are three basic parts to the test. The portion of the home must be used exclusively and regularly, as the principal place of business for the trade or business in which you are in and have no other place at which business is conducted.
During the normal activities of the business, it is used to conduct meetings with clients or customers during the normal course of business - and if you have a separate building that is not connected to the home.
For those with businesses that operate out of the home, similar rules apply if the home office is used exclusively for the administrative and management duties to operate the business and there is no other fixed location at which these duties can be performed.
For example, a plumber who has his office in their home can usually use a portion of the home's expenses as a business use deduction. However, if they have an office in a building where they meet with customers and maintain records, the home use provisions will not apply.
The deductible amount is based on the percentage of the space used for business use. To calculate the percentage, divide the square footage of the home office by the total square footage of the home. That percentage becomes the magic deductible number for calculating all business deductible amounts.
For example, if your home office measures 200 square feet and your home is 1800 square feet, your home office represents 11 percent of the home's size.
Multiply the rent or mortgage amount by 11 percent to determine the amount of the rent or mortgage that can be deducted as a business expense. If the mortgage payment is $800 per month, for instance, $88 of that amount can be deducted as a business expense.
Additionally, unless you have utilities separated for the home office, the same percentage is applied to utility bills as well. The deduction is applicable for real estate taxes, casualty losses, insurance, depreciation and maintenance. Lawn care and general upkeep on rooms not used for business are generally not considered deductible expenses.
Keep in mind the rules governing regular use and if you have a separate office where you also conduct business such as meeting clients or customers outside the home, simply going over contracts or books while at home in the evening does not qualify for a deduction for business use of the home.
Godfrey Thaxter is a Marketing Consultant who provides
articles, tips and resources to help new online marketers
get started right with their internet home business.
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