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Office Deductions
Whether your small business is run out of your
home because there is no need to rent office space, or because you are just
getting it off the ground and cannot afford a separate office yet, home office
deductions can save you a substantial amount in taxes at the end of the year.
Knowing what you are entitled to deduct, and keeping well organized and detailed
documentation of those potential deductions, is crucial to taking advantage of
the tax benefits of keeping a home office.
Qualifying for the Deduction -- The first thing you must determine is if your home office qualifies for the home office deduction. There are two tests that must be passed to qualify your home office. First, you must regularly and exclusively use part of your home for your business. This could be an extra bedroom, a garage or a family room you have converted into an office. Second, you must use your home office as your principal place of business. This does not mean you cannot have another separate place where you conduct business, but your home must be used "substantially and regularly" for your business.
What Can Be Deducted--Home office deductions fall into either a direct or indirect expense. Direct expenses are expenses that most businesses incur, such as advertising, supplies, attorney fees, and wages. As a general rule, the full amount of a direct expense is deductible. Indirect expenses are things related to running or keeping up your home. Expenses such as utility bills, home owners insurance and repairs fall into the indirect expense category. These expenses are calculated by determining the percentage of your home used for your home office and then multiplying the expense by that percentage. For instance, if you use 20 percent of the total area of your home for your home office, and your utility bills for the year were $3,000, then you could deduct $600 for your home office portion of the expense ($3,000 x .20 = $600)
By keeping track of all your direct and indirect expenses throughout the year, you should find that your tax obligation is substantially less at the end of the year.
Qualifying for the Deduction -- The first thing you must determine is if your home office qualifies for the home office deduction. There are two tests that must be passed to qualify your home office. First, you must regularly and exclusively use part of your home for your business. This could be an extra bedroom, a garage or a family room you have converted into an office. Second, you must use your home office as your principal place of business. This does not mean you cannot have another separate place where you conduct business, but your home must be used "substantially and regularly" for your business.
What Can Be Deducted--Home office deductions fall into either a direct or indirect expense. Direct expenses are expenses that most businesses incur, such as advertising, supplies, attorney fees, and wages. As a general rule, the full amount of a direct expense is deductible. Indirect expenses are things related to running or keeping up your home. Expenses such as utility bills, home owners insurance and repairs fall into the indirect expense category. These expenses are calculated by determining the percentage of your home used for your home office and then multiplying the expense by that percentage. For instance, if you use 20 percent of the total area of your home for your home office, and your utility bills for the year were $3,000, then you could deduct $600 for your home office portion of the expense ($3,000 x .20 = $600)
By keeping track of all your direct and indirect expenses throughout the year, you should find that your tax obligation is substantially less at the end of the year.
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TAX ADVICE DISCLAIMER: In accordance with IRS
Circular 230, any tax advice included in this communication, including
attachments, is not intended or written to be used, and cannot be used by you or
any other person or entity, for the purpose of avoiding penalties that may be
imposed under the Internal Revenue Code or applicable state or local tax law
provisions, nor may any such advice be used to promote, market or recommend to
another party any transaction or matter addressed within this communication. If
you would like such advice, please contact us.
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