| The Internal Revenue Service determines whether | | | | sole source of income? If so, the IRS is more inclined |
| your claimed home based business tax deductions are | | | | to consider the activity a business. |
| legal using various criteria. Is your home based | | | | Home Office Let's say a taxpayer's activity is |
| business really a business or a hobby? Are the | | | | classified as a business and that there is a office in the |
| deductions claimed really for business use or personal? | | | | taxpayer's home, additional criteria must be met before |
| Is your business a scheme masquerading as a | | | | any home based business tax deductions are allowed |
| business? These are some of the questions that must | | | | for the office. |
| be answered to ensure your home business tax | | | | A home office must be used exclusively and on a |
| deductions are legal in the sight of the IRS. The IRS | | | | regular basis as the principal place of business by the |
| has surmised that home businesses are fertile ground | | | | taxpayer and at no time used for personal or family |
| for tax fraud and look closely at returns to weed out | | | | use. Two exceptions to this exclusive use test are: |
| any abusers of home business tax deductions. | | | | (1)A area of the home that is used to store inventory, it |
| Some but not all home based business tax deductions | | | | must be a specific and identifiable. (2)The home is |
| you may qualify for are: home office space and a | | | | used regularly to provide day-care services to children, |
| portion of utilities, telephone, maintenance costs, office | | | | handicapped persons, or the elderly. |
| Furniture, cleaning expenses, licenses and regulatory | | | | A home business tax deduction can also be taken if |
| fees, air fares, auto expenses ,books and magazines, | | | | the home office is used to conduct administrative or |
| educational expenses, meals with business clients, | | | | management activities, and the taxpayer has no other |
| laundry expenses (When Traveling), and advertising. | | | | fixed location in which to do so. Additionally, a home |
| Business or Hobby? | | | | business tax deduction is allowed for business |
| Your home based business could be classified as a | | | | expenses associated with the regular use of a |
| hobby rather than a business by the IRS. The is a | | | | separate structure that is not attached to your home. |
| critical distinction. Why? Many businesses will have an | | | | Personal Vs. Business Expenses IRS section 162 at |
| operating loss during a tax year. This loss is used to | | | | allows for: |
| offset any income from other sources. In contrast, a | | | | A home based business tax deduction for all the |
| loss from a hobby is not deductible and cannot offset | | | | ordinary and necessary expenses paid or incurred |
| other sources of income. To put this simply, in a | | | | during the taxable year in carrying on any trade or |
| business you have income from sales and losses from | | | | business. It continues by giving these examples: |
| expenses. The two offset or counter each other. In a | | | | A reasonable allowance for salaries or other |
| hobby it is usually one way to the IRS. Everything you | | | | compensation for personal services actually rendered. |
| make is taxable and everything you spend is your | | | | Traveling expenses (including amounts expended for |
| contribution to the hobby, and not eligible for a home | | | | meals and lodging that are not lavish or extravagant |
| based business tax deduction. | | | | under the circumstances) while away from home in |
| Really, is it a business? | | | | the pursuit of a trade or business. This does not include |
| Here's how the IRS distinguishes between a home | | | | lunch during the average day. |
| based business and a hobby: | | | | There are many tax benefits and deductions available |
| The manner in which you conduct business. Do you | | | | to the home based business owner. You should |
| maintain accurate books and records? The amount of | | | | determine that you are a business, the correct amount |
| time you devote to operating the business. Do you | | | | of your taxable income and know exactly what home |
| have expectations that your assets used in the | | | | business tax deductions to include and exclude from |
| business will appreciate in value? Whether you have a | | | | your home business tax return. Consulting a tax |
| history of success in other activities. Your history of | | | | professional and some tax software can best help |
| income and losses. Do elements of personal pleasure | | | | you determine which home based business tax |
| or recreation exist? Do you have a DBA, business | | | | deductions your business qualifies for legally. |
| checking account, or a business phone? Is this your | | | | |