Q: My business is
homebased-operating out of my home. Am I entitled to any business
tax deductions as a result of that?
A: Yes. You are entitled to the
normal business tax deductions wherever you operate your business.
In fact, because your business is homebased, you may be entitled to
take a special home-office deduction, but even if you don't
qualify to take this deduction, you may still deduct the
"ordinary and necessary" expenses that apply to the
operation of your business.
How the owner takes a home-office deduction is to some degree a
function of the business's legal form of business organization.
There are three ways a small-business owner can consider qualifying
for a home-office deduction: (1) If the business is operating as a
either a sole proprietorship or a one-member Limited Liability
Company (LLC); (2) if the business is operating either as a
partnership or a multimember LLC, electing to be taxed as a
partnership; or (3) when the owner of the business is also
considered an employee of the business-as in the case of C and S
corporations or an LLC, electing to be taxed as a corporation.
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The next consideration in qualifying to take a home-office
deduction is that you must be using a portion of your home for your
business, and be doing so on both a regular and exclusive basis.
"Regular" means that you use a specific area
continuously, as opposed to occasionally or incidentally.
"Exclusive" means that either you do not use this
specific space for personal use, or if you do, that you pro-rate
between personal and business use.
The third element in qualifying is that this home office is your
principal place of business-used regularly and exclusively for
business, and that you have no other fixed location where you
conduct substantial administrative and management activities of
your business.
If you qualify to take a home-office deduction, you will be
entitled to the following deductions, pro-rated between personal
and business use: depreciation on the house, home mortgage interest
and real estate taxes (or rent), home insurance, utilities, wages
for domestic help and local phone service (excluding your basic
service).
Whether or not you qualify to take a home-office deduction, you
are entitled to take the following "ordinary and
necessary" business tax deductions: professional services
(such as accounting, attorney and consulting services), logistical
support (alarm systems, cleaning, long-distance phone service,
office supplies, postage, shipping, printing, repairs and
maintenance), the cost of financial services (such as bank service
charges), your car, your office equipment, furniture and fixtures,
travel, entertainment, retirement, hiring your family, tax-free
owner benefits (such as health insurance coverage), wages and
salaries, marketing, insurance, payroll taxes and other non-income
taxes.
You cannot, however, take home-office deductions that create a
loss during a current tax year. After the business's taxable
income has been reduced to zero (by taking all allowable business
tax deductions), any remaining unused business tax deductions
(referred to as a net operating loss, or NOL) can be carried back,
to reduce the previous year's business income, and forward, to
reduce the future year's taxable business income. This process
can continue until the entire NOL has been used up. Note: This
limitation does not apply to the "ordinary and necessary"
business tax deductions, meaning that after these deductions reduce
your taxable business income to zero, they can be applied as
reductions of your other (personal) taxable income.
Note: The information in this column is provided by the
author, not Entrepreneur.com. All answers are general in nature,
not legal advice and not warranted or guaranteed. Readers are
cautioned not to rely on this information. Because laws change over
time and in different jurisdictions, it is imperative that you
consult an attorney in your area regarding legal matters and an
accountant regarding tax matters.
David Meier is the founder and COO of Business Development Coaching, a company that provides
small-business owners with ongoing business coaching.