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Tax Benefits Of A Home Based
Business
Not many of us know that there are many more benefits of working from home apart
from having the luxury of working from itself. Yes, believe it or not you can
claim almost every single penny you spend on your home business. If you are one
of the owners of the home based business you should feel lucky that you are
blessed with variety of tax deductions. The expenses that you incur on your home
based business are tax deductible. But tax law may vary depending on where you
live, contact your local office to find out what deductions you can claim for
your home based business.
Some possible deductions include the business portion of your home. What
business portion means is how much area of your house you use it for doing home
based business. Again check with your local office if there is a maximum limit
for the area that you can claim as business portion. You may be able to claim
the following:
- Mortgage Interest
- Rent
- Electricity
- Telephone
- Internet
- Expenses for maintenance and repair
- Property Taxes
- Home Insurance
The best way to calculate is, first calculate the space that you are using for
your home based business and then calculate the % of your business space to the
total area of your home. So, suppose if you are 5% of your total home area for
home based business you can claim 5% of your heating expenses for the days for
deduction.
Apart from claiming the above, you may be to deduct the indirect expenses
incurred with regard to your home business. They are:
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Meals and entertainment for business related reasons.
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Business travel expenses.
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Office supplies such as printer, cartridges, paper etc.
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Advertising costs.
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Equipment you purchase for use in your business, such as a computer.
Here is a surprise for you, you can also deduct spouse and children for your
home based business if you employ them. You can even set up a pension plan while
operating a home based business. Not only that you can also deduct the losses
you have incurred based on the circumstances.
Certain restrictions apply for who can use this benefit, as per IRS the
following applies:
“To deduct expenses related to the business use of part of your home, you must
meet specific requirements. Even then, your deduction may be limited.
Your use of the business part of your home must be:
Exclusive (see *exceptions below),
Regular,
For your trade or business, AND
The business part of your home must be one of the following:
Your principal place of business,
A place where you meet or deal with patients, clients, or customers in the
normal course of your trade or business, or
A separate structure (not attached to your home) you use in connection with your
trade or business.
Additional tests for employee use. If you are an employee and you use a part of
your home for business, you may qualify for a deduction. You must meet the tests
discussed above plus:
Your business use must be for the convenience of your employer, and
You do not rent any part of your home to your employer and use the rented
portion to perform services as an employee.
Whether the business use of your home is for your employer's convenience depends
on all the facts and circumstances. However, business use is not considered to
be for your employer's convenience merely because it is appropriate and helpful.
Exceptions
You do not have to meet the exclusive use test if you satisfy the rules that
apply in either of the following circumstances.
You use part of your home for the storage of inventory or product samples.
You use part of your home as a day-care facility.”
Keeping in mind the above restrictions the following are the examples of the
expenses that are generally not deductible as business expenses per IRS:
The following are a few examples of items that are generally not deductible as
business expenses:
- Deducting all or most of the cost and operation of a personal residence. For
example, placing a calendar, desk, file cabinet, telephone, or some other
business-related item in each room does not increase the amount that can be
deducted.
- Paying children a salary (e.g. for answering telephones, washing cars, etc.).
- Deducting education expenses from salaries paid to children wrongfully claimed
as employees.
- Deducting excessive car and truck expenses when the vehicle was used for both
personal and business use.
- Deducting personal furniture, home entertainment equipment, children's toys,
etc.
- Deducting personal travel, meals, and entertainment under the guise that
everyone is a potential client.
But the above said thing should not be a discouragement because these are for
those people who seek abusive tax shelters and play with rules. But if you are
honest and really do a home based business you can go ahead and take advantage
of the benefits available to them.
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