For some entrepreneurs, the small business tax deductions begin at home
Many people who received buyouts and severance packages last year used the money to start home-based businesses. Now, they’ll want to take tax deductions for their home offices.
The deduction used to be scary. It was widely believed that taking the deduction would automatically bring an IRS audit. Tax advisers say that’s no longer the case. But if you don’t follow the rules, you could still draw the IRS’s attention.
■Know the rules. IRS Publication 587 spells out rules under which you can take a deduction for using your home as your office, manufacturing facility, or warehouse. Your home office should be used exclusively and regularly as your principal place of business, or exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business.
“Exclusively’’ refers to the requirement that the part of your home you use for business cannot be used for any personal reason. The IRS does not require that it be a complete room in a house, or that the space you use be partitioned. It does require that your home office or workspace be a “separately identifiable space.’’
If your computer and papers are spread out on the dining room table and you put them away when it’s time to eat, you can’t take the deduction. But if you have a corner of your family room that is clearly a home office, and your kids don’t use it to do their homework, then you can qualify.
“Exclusively’’ does not mean your home office has to be the sole place where you do business. You may have a home office but need to rent space by the hour to see clients in a more businesslike setting (away from the kids and barking dog), for example.
■What can you deduct? Part of your expenses - such as mortgage or rent, insurance, utilities, maintenance costs, and repairs - can be deducted. The IRS allows business owners to deduct the portion of their home expenses that can be attributed to the office or work area. The most commonly used method is to compute the percentage of your home’s square footage that is devoted to the business. If your home has 2,000 square feet and your office takes up 200 square feet, you can deduct 10 percent of your expenses. But many home-based business owners are surprised to find how little they end up deducting.
The home office deduction also allows a business owner to take deductions that are not ordinarily available to homeowners, including depreciation on the home.
A word of caution: If you claim a deduction that seems exorbitant, it may catch the attention of the IRS. In that case, the agency might want to see your home office.
■The mechanics. To claim a home office deduction, complete IRS Form 8829. The form and instructions can be downloaded from the IRS website.
Joyce M. Rosenberg writes for the Associated Press.