The home office deduction gets a bad wrap. There are so
many rumors out about the home office deduction that you
may want to avoid the whole subject. But if you have a
home office and aren't deducting it, you could be missing
out on some very valuable tax savings. Let's take a look at
the truth behind the myths about the home office deduction.
Myth Number 1 - The home office deduction is a red flag for
an audit.
Twenty years ago, this might have been true, simply because
it was unusual. Now, the home business seems to be almost
as popular as home ownership! Millions of individuals
operate some kind of business activity out of their homes.
Others telecommute, and deduct their home office expense as
an itemized deduction. The home office deduction is no
longer an automatic flag for an audit.
The key to avoiding an audit is reasonableness. The IRS
uses computer analysis on all tax returns. Any deduction
that is excessive on your income and the benchmarks for
your industry may be questioned.
Bottom line: Deducting a portion of your home expenses as
a cost to operate your home-based business is expected!
Myth Number 2 - If I take a home office deduction, I can
deduct all the costs of my home.
You deduct a portion of your home expenses as a home office
expense based on the square footage of your home office
space. If you have a 2000 square foot home, and a 200
square foot office, you could deduct 10% of your home
expenses.
Unless you operate a day care center, your home office
space must be exclusively used for business. Your kitchen
will not qualify as home office space simply because you
use the table to complete paperwork. If you use the space
for personal and business, it does not qualify.
The easiest way to keep track of this is to designate a
room or rooms for home office purposes. If you don't have
a complete room to use as office space, use furniture to
separate the personal part from the business space.
Of course, there is an exception to this rule. If your
business is wholesale or retail and you do not have any
other fixed location, you can include any space you use for
storage of inventory or product samples as part of your
home office. This space does not need to be used
exclusively, but must be used regularly, and be suitable
for storage.
Bottom line: Calculate the square footage you use
exclusively for business and the square footage of your
storage space for inventory to determine your home office
deduction.
Myth Number 3 - I can only take the home office deduction
if I work at home exclusively.
Old rule! Congress expanded the home office deduction to
allow business owners without any other fixed business
location to take a home office deduction regardless of the
number of hours they spend at home. If you provide services
to customers or clients at their location, you can still
qualify for the home office deduction. You simply must use
your home office for administrative and management duties.
Bottom line: You can deduct your home office as long as
you don't pay for other office space to run your business.
Myth Number 4 - The home office deduction will make me lose
my tax exclusion on the sale of my home.
The rules have changed here, too. If you use 10% of your
home for business purposes, you no longer have to recognize
10% of the gain on the sale that could have been excluded
if you meet the requirements for the sale of your principal
residence.
What you do need to do, however, is include any
depreciation deduction you took in prior years as a taxable
capital gain. You still benefit, because your capital gain
rate is most likely lower than your ordinary income tax
rate. You are able to take the original depreciation
deduction at ordinary income tax rates, and bring it back
into income when you sell your home at the lower capital
gain rate. Your depreciation deduction can also reduce
your self-employment taxes.
Bottom line: You can still save taxes overall by taking
the home office depreciation deduction each year.
Operating your business from home is a very smart move
financially for the new or small business owner. You can
save yourself thousands of dollars in rent by operating at
home rather than renting business space.
But the cost of housing your business is an expense, and
should be treated that way. You would not hesitate to
deduct rent expense for your business. Treat your home
business expense the same way. The tax money you save can
be used to grow your business, or even to fund your family
vacation! Talk to your tax preparer if you have more
questions, and get ready to take that home office deduction
on your next tax return!
----------------------------------------------------
Todd Jensen, "The Profit Engineer", has helped hundreds of
business owners make their business more successful and
profitable. For tips and strategies on how to boost your
business success as well as increase your profits, visit
http://www.theprofitengineer.com or
http://www.freebusinessstartupinfo.com
No comments:
Post a Comment