We all know that there are many advantages to owning a home based business. Working from home allows you more freedom to spend time with your family and friends, more time to do the things that you want to do, and the ability to set your own hours and standards of business operations. However, there are many tax advantages from owning a home based business as well.
First, it is important that you keep good records. You must be able to prove that your home based business is not just a hobby – but an actual income producing business in order to qualify for the deductions.
According to the Internal Revenue Service, in order to qualify for the home business deductions, you must use a portion of your home exclusively and regularly as your principle place of business. This means that you must use a specific area of your home only for your business. If the area in question is used for both business and personal use, it does not qualify.
For instance, a spare room that is used only as a home office qualifies. However, if you operate your business from your kitchen table, that space does not qualify – because your kitchen is used for personal use as well as business use. There are only two exceptions to the exclusive use rule. If your home is used to operate a daycare center, you qualify. You also qualify if part of your home is used for the storage of inventory or product samples.
If you qualify for the home business deduction, you can figure the deduction that you will be allowed to take. This is based on the amount of space you use in your home for business purposes, in relation to the overall size of your home. There are two ways to determine this, and both methods are acceptable by the IRS’s standards. First, you can divide the area – which is the length multiplied by the width – of the space you use for your business, by the total area – length multiplied by width – of your home. This will give you the percentage that you are allowed to deduct.
The easier method, in most cases, is to go by the total number of rooms in your home. If all the rooms are about the same size, you can simply divide the number of rooms used for your business by the total number of rooms in your home. If your home had five rooms, all being about equal in size, and you only use one of those rooms for your business, your deduction would be 20% ( 1 divided by 5).