I talked last week about working with a client who is setting up a business being a companion to elderly ladies. (Great business idea, by the way!). She wondered if she should set up a home office and whether she would be entitled to tax deductions for this office space..
Since she certainly has a legitimate business, she doesn't need to worry about IRS "hobby loss" rules but she needs to sure she is using the office "regularly and exclusively" for business. She has a desk in one bedroom, so I suggested clearing out everything on the desk and making sure nothing personal remains. She can calculate the area of the desk as her home office.
Her dog sleeps under the desk, so I said she would have to find a different place for the dog to sleep. Sorry, but "exclusively" means "no dogs in the office."
Once she has established her right to use the office space as a tax deduction, she can calculate her home office deduction percentage and deduct home office expenses on her tax return, subject to IRS limits, of course.
Finally, I urged her to discuss this question with her tax advisor. Some tax professionals believe the IRS targets home offices for audit, while others don't worry about it. She needs to follow the advice of her tax advisor about whether to deduct home office expenses.
For more information: 10 Facts You Need to Know about Home Based Businesses and Taxes.
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