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Separating Home Business and Personal Expenses for Tax Purposes

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Question: Separating Home Business and Personal Expenses for Tax Purposes
Answer:

Home Business Expenses vs. Personal Expenses
Home business owners often have a difficult time determining how to classify expenses into business and personal use. Business expenses are tax deductible, while personal expenses are not.

Types of Expenses

Property that can be used both for business and personal expenses is classified as listed property by the IRS. Because listed property (computers, cars, other business equipment) can be used for both business and personal activities, the owner must clearly differentiate the types of use. Cell phones are no longer considered listed property.

CPA Gail Rosen looks at some specific situations and offers comments on tax deductions:

Q: I have one cell phone for both business and personal use, since I don't have a business phone. What phone expenses can I take as business expenses? Can I estimate the percentage of business use and divide the monthly bill up that way?

A: The Small Business Jobs Act of 2010 eliminated telephones from the definition of listed property, so for tax years 2010 and forward, cellular telephones are no longer subject to the stricter substantiation rules. The taxpayer must determine if the cell phone has de minimis (minimal) personal use if they determine this, then 100% of the cost of the phone charges will be deemed business. If the use is not de minimis, then the taxpayer has to substantiate the business use each month.

Q: Can I split up computer use and printer use the same way, with percentage of use by the business? Or do I need to have explicit records showing business use?

A: The taxpayer's computer is under “listed” property rules and must have adequate substantiation. Note the following:

  1. A computer and related equipment (such as a printer or modem) are 100% deductible if used solely for business purposes in an area of the home that qualifies for home office deductions. By definition, a computer in an area of the home that qualifies for home office deductions is not listed property.
  2. Laptops, notebooks, and other portable computers that are used in many areas because of their portability are not used exclusively at a regular business establishment (or home office. These devices would be considered listed property and are thus subject to stricter substantiation rules (even if used 100% for business).

Q: How do I deduct Internet (ISP) expenses? Can I estimate a percentage of use by business for this one?

A: The taxpayer must provide adequate documentation for the business use of the Internet. This would include a log showing dates and length of time the Internet was used for business purposes and what sites were accessed during those hours, to show business purpose.

She must also provide ABC with an adequate accounting of her use of the computer itself—for example, by means of a log showing each date she used the computer, the length of time of each use and the business purpose of each use.

Q: What if I am using just part of a room for my business? Do I have to have the actual square footage of the area that is exclusively and regularly used for business purposes? Can I just estimate?

To qualify for a home office deduction, a taxpayer must use the space both exclusively and regularly for business purposes. Failing to meet either of these conditions results in the disallowance of a home office deduction.

To figure deductions for the business use of the taxpayer’s home, divide the area used for business by the total area of the taxpayer’s home, including the basement. The taxpayer may measure the area in square feet. To figure the percentage of the home used for business, divide the number of square feet of space used for business by the total square feet of space in the home. If the rooms in taxpayer’s home are about the same size, figure the business percentage by dividing the number of rooms used for business by the number of rooms in the home.

Read more about how to how to calculate your home business space deduction.

Gail Rosen is the owner of a well-respected boutique accounting firm in Martinsville, NJ that has been serving individual and business clients for over 27 years. In addition to tax preparation, the firm specializes in assisting business start-ups in understanding their tax responsibilities and what deductions they are entitled to. Gail has earned a reputation for putting complex tax issues into language others can comprehend and profit from. You can email her at grosen@gailrosencpa.com

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