Many home business owners are confused about taxes and deductions. Instead of being confused, consider these points and learn how to minimize your taxes legitimately.
Myth #1 - I can use a percentage of all home expenses as business deductions.
The Truth: You can only take those home expenses that are legitimately related to or which benefit your business. For example:
- You can deduct the interest on your home mortgage (not the principal) but only if that mortgage is for the benefit of your business. You cannot deduct a second mortgage used to buy a car or pay off personal credit cards.
- Your phone charges for your home phone line are non-deductible personal expenses. But you can deduct the cost of long-distance charges for business (keep records!) and the cost of a second business phone line.
Myth #2 - I can deduct a section of my home as a business, as long as I use it most of the time for business purposes.
The Truth: You can only deduct a home office or business work area in your home if it meets two criteria. It must be used (a) regularly, and (b) exclusively for business purposes. If you use your dining room for your office, and you have holiday dinner on the dining room table, it is not being used exclusively for business purposes. For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.
Myth #3 - I can deduct home improvements as part of my home business expenses.
The Truth: Unless you can prove specifically that the improvement was of direct benefit to your home business, you can't deduct it. If the improvement was to the area used for business, like expansion, painting, or carpeting, you can probably deduct it. If you put a new patio on the other side of the house, it is not related to your business and won't be deductible.
Myth #4 - I can take all allowable home business deductions, even if they cause my business to run a loss for the year.
The Truth: There is a limit to the amount of home business deductions you can take in any one year. Your deductions cannot exceed your gross business income for the year.
Myth #5 - If I have a business location outside my home, I can't take a home office business deduction.
The Truth: You can have more than one business location and still deduct the expenses for the business use of your home is your home is your principal place of business. When determining whether your home is your principal place of business, consider:
- The relative importance of the activities performed at each place where you conduct business, and
- The amount of time spent at each place where you conduct business.
One final note from the IRS:
The IRS encourages taxpayers to familiarize themselves with the requirements before taking a home office deduction and to keep complete and accurate records to substantiate deductions. According to IRS research, understated business income, including underreported receipts and overstated expenses, is an area where compliance is a concern. In addition to increasing outreach and education in these areas, the IRS will also be focusing enforcement efforts, including examinations, on these issues.
