Many small businesses have the primary operation of the business within the home. Although the entire home may not be used for the business, there is a section that may be set aside for business use and this can be to your advantage when filing your taxes. In this article, we are going to review some of the deductions that are possible with a home-based business, how much you may be able to deduct and how to determine any limits that may exist for business deductions. Any further questions can be answered by the professionals at Tax Force Inc.
Determining the Use of the Home
First of all, it is necessary to determine the use of the area of your home which is directly related to your business. In order for you to be able to file your taxes and to claim a deduction because of using your home for your business, it must be for the exclusive use of your business, and must regularly be used for business purposes. You may need to contact or meet with clients in the area, but it is not required.
It may also be possible for you to count a deduction for a separate structure, even if it is freestanding on your property. In order for you to file a deduction for that separate structure, it has to be used exclusively and regularly for business practices but it does not need to be the primary place of your business. For example, you can use a garage to build what you are selling and meet with clients in your dining room within your home. You can count the garage as a separate structure.
Deduction Limits for Home-Based Businesses
There may be certain deduction limits that exist for your business when you operate it out of your home. For example, you can only count the part of the home that is used exclusively for business use and you will not be able to deduct all of the expenses of the home on your taxes.
In order to determine the deduction limits, it is necessary for you to get a comparable size of the part of the home that is used for the business in relation to the entire home. This is typically done by figuring the area of the entire home and comparing it with the area of your office. This information is recorded on part one of Form 8829.
Beginning in the tax year 2013, there is a simplified option when figuring the deduction for business use of home. A standard deduction of $5 per square foot of home use for business, limited to 300 square feet.
Note: When you use the business use of home deduction, this may impact your cost basis when selling your home.
There are different types of expenses which may be associated with your business that can be deducted on your taxes. They are generally separated into 2 separate groups, those that are related to business activity and related to the business use of the home.
Business Activity - This would include any necessary expenses, such as car and truck expenses, advertising and salaries.
Business Use of the Home - This would include direct, indirect and unrelated expenses of your home-based business. The direct expenses are those that are associated with the business part of the home and may be able to be deducted in full. Indirect expenses are in association with operating the entire home but you will be able to deduct a percentage, depending upon the amount that you use for business purposes. Some examples would be rent, utilities, insurance and even mortgage interest. Unrelated expenses are associated with parts of the home that are not used for business practices, such as improvements or lawn care.
If you have any questions about deductions for your home-based business, you can contact the professionals at Bhuiyan cpa. We would be happy to assist you in getting the information that you need and in filing your taxes properly.