Tax Advantage Tips for Home-based Business

If you are one of the more than 38 million (according to the U.S. Census) home-based businesses in the United States, you’ll be happy to know that special tax rules apply to you. Here’s how you can make the most of your home-based business tax status.

Deduct some of your personal housing costs

If you meet one of two tests in the tax law, you can deduct a portion of your personal expenses of operating from your home as a business expense. This includes your rent if you lease or your mortgage interest and real estate taxes if you own your home, as well as utilities, insurance, repairs and other costs.

To be a deductible home office, Your home must be

  1. your principal place of business (or a place where you do administrative chores, such as scheduling and record keeping, and you have no other fixed business location) or
  2. a place to meet or deal with customers, clients and patients on a regular basis (telephoning customers from home isn’t enough).

You have to use the space regularly and exclusively for business (except in two special situations). This means you can’t use the kitchen table as your desk by day and feed your family there at night. You don’t need to use an entire room or even have a physical partition to denote the portion of a room used for business.

Generally, you deduct a portion of the expenses of a home. For example, if your home is 3,000 square feet and you use a 300-square-foot room as your office, then 10 percent of each expense of the home becomes part of the home-office deduction. You can add to this any direct expenses for the office, such as painting it.

Tip: It’s helpful to take a photo of your office and keep it with your tax records in case the IRS questions your setup.

Deduct traveling costs from your doorstep

If you use your car or truck to go from home to a business location, your mileage from home and back becomes a tax-deductible expense once you establish your home as your place of business. Business driving can include such activities as driving to:

  • Customers or Meetings
  • Vendors or Suppliers
  • The bank to deposit a fee
  • An office supply company to purchase toner for your printer
  • or any activity pertaining to your business

Note: If you have a full time job where you geta regular paycheck, your commute from home to work and from work to home is not deductible. But traveling to and from a client’s location is deductible, see the tips on mileage tracking.


Mileage


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  1. The standard method in 2016 it is 55.9 cents per business mile plus tolls and parking.
  2. The actual method is to add up all automobile expenses; including gas, repairs, oil change, car insurance, car washes, etc. – and then multiply it by your business percentage (business miles/total miles for the year). Your commute from home to work is not deductible. But traveling to and from a client’s location is deductible.

Tip: As with any use of a vehicle, keep a record of your business driving as required by the tax law. Learn the “How TOO” track mileage log”.

Deduct cost of computers and office equipment

Usually, if you use a computer for both personal and business purposes, you have to track business usage because first-year expensing (the Sec. 179 deduction) and accelerated depreciation is allowed for the cost of “listed property” only if business usage exceeds 50 percent of total usage — a computer is listed property. But once you establish a home office, you don’t have to keep a log because a computer used in a regular business establishment (the home office) is not considered listed property.

For example, if you buy a computer for your home office in 2016 for, say, $1,500, you may qualify to deduct the full cost as a first-year expense deduction because the computer is used in a regular business establishment.