More than one million new businesses are started each year. There are more than 27.2 million small, non-farm businesses in America. Of that Include 52 percent home-based businesses and two percent franchises. Of that, 52 percent are home-based businesses. 44 percent survive at least four years, and 31 percent survive at least seven years. Twenty-four percent of all new businesses begin with no outside financing.

          What this is all pointing to (in my opinion) is there are a lot of Home based businesses out there, meaning there ought to be a lot of you with a home office for that business. Good news, the expense you have there are indeed deductions. But use caution.

          The IRS has a lot of material out there for you to gather information on what’s what. After and or during your reading of all this material I would suggest you find a qualified tax professional to get a more in-depth look at your particular situation.

Note:

           Depending on the size and nature of your business you may also need the year-round services and guidance of a public accountant, or perhaps just an experienced bookkeeper.  Obviously there is a big difference in the costs involved with a public accountant vs that of a bookkeeper or bookkeeping service.  Many tax professionals offer year-round bookkeeping, accounting and payroll services for their small business clients, while others do not.  You should look for a tax professional, and/or an accountant or bookkeeper, with experience in your specific type of business. 

           If you feel you need an accountant be aware that you do not “need” to use a “CPA”, although there are many qualified public accountants specializing in small business that happen to be “certified”, and there may be situations where a bank or creditor may require financial statements prepared by a CPA (in which case you can hire one for the specific “engagement”). 

           A qualified and experienced “non-certified” public accountant may be better depending on your individual situation and needs.  Many states require the licensing of “non-certified” public accountants.  (As a general rule, CPA firms tend to charge a higher fee than a “non-CPA” firm, sometimes substantial, and a small “non-certified” firm may provide more personalized or individualized service.)

          You should make your decision on which firm or individual to use based on your specific needs and the specific training and experience of the firm or individual, and not make any false assumptions based on initials or lack thereof

This note appreciatively provided by
tax professional, colleague, and friend,
Robert Flach The Wondering Tax Pro.

          Record keeping or bookkeeping is vital. Most (especially when starting out) will forgo the paper work side of things and concentrate 100% on carrying out their business and worry about the accounting of it all later.

          One of the most important things you can do for your business is keep a calendar. In the calendar write down what you did, whom you met with, where you went, how many miles you went and what you spent. Keeping accurate records will save you money with your tax professional as you have all the numbers gathered already, thus reducing their time on your bookkeeping, reducing their bill.

          Okay, so what some valid home office business deduction? A valid business deduction is generally an expense that specifically relates to the production of income, or anything that is “ordinary and necessary” to maintain your business. Of course there are exceptions. For more you can take a read through the IRS Publication 587, Business Use of Your Home and the instructions for Form 8829, Expenses for Business Use of Your Home (Instructions). Below are some examples of possible home office deductions.

  • Telephone
  • Computers/software
  • Office furniture
  • General office expenses

          You’ll also be able to write off some of your regular household expenses as business deductions.  To be a valid deduction there are several stipulations that must be met. The business portion of your home must be used exclusively and on a regular basis

  1. Your principal place of business
  2. A place of business used to meet with clients or customers

          The deductions will be based on a percentage of business space to regular living space of your home.

Home-Office Example:

      Your home has 2,548 total square feet of space. 253 square feet is the total amount of space you are using as your office. This will give you a deduction of about 10.13% of certain expenses.

“There are actually several way to calculate the percentage and you’ll want to consult your tax pro on what is most advantageous for you.”

 Some examples of home office expenses

  • Real estate taxes
  • Mortgage interest
  • Utilities
  • Home insurance
  • Snow removal
  • Exterminators
  • Plumbers
  • Casualty losses
  • Home repairs and maintenance
  • Security system
  • Depreciation

 Also, keep track of those things that are a direct expense. Meaning if you have a repair in the home office itself that expense is direct and generally is 100% deductable.

Note:

          There is no requirement that the business portion of a room be physically separated from the rest of the room by a wall, partition or other demarcation.

 

Please read IRS Publication 587, Exclusive Use

For other great information, please visit

The U.S. Small Business Administration site.

Other helpful post from TWTP

HOME OFFICE EXPENSES OF A ONE-MAN CORPORATION – December 4, 2006