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If you are running a new home-based business, or have begun telecommuting for an established company, then you can consider claiming home office tax deductions on your next tax return. There are many benefits to be enjoyed by those who can qualify for these tax deductions. But you should first make sure to determine if home based tax deductions appropriate for your situation

What do you stand to gain?

If you meet the requirements for a home office deduction as defined by the IRS, then you may be able to deduct a percentage of the following:

• The real estate property taxes on your home
• Interest on your mortgage
• Depreciation on your home (if you own)
• Your rent payments if you are not a home owner
• Utilities
• Painting, and repairs
• Insurance for homeowners or renters

If your home office qualifies as your principal place of business, then you can also deduct business related commuting expenses, such as traveling to and from clients or vendors.

All of your home office deductions are calculated using the IRS Form 8829. Terms and conditions may vary, so make sure to do your research. The IRS has several publications on issues involving home office deductions. Alternatively, you could ask a tax consultant.

Some considerations before making your claim...

There are a few things you should keep in mind, however, when claiming any home office deductions:

• Make sure that you are familiar with and meet the specific requirements needed to claim deductions.

• Some people believe that by claiming home office deductions you will increase your chances of receiving an audit. Whether or not this is true, it is in your best interest to keep good records including photos of your work area, as well as any documentation, such as a bill for a separate phone-line, that can prove the existence and usage of your home office.

• Some of the deductions have limitations. If, for example, your gross business income is less than your total business expenses, you cannot claim a home office deduction. Again, you should make sure that you are clear with what you can claim.

In short, while the home office deduction offers many benefits to those who work from home, it does require that you be well informed and that your operations are well documented.

Ahhh… The smell of tax season is in the air!

For those of you who have recently started a home business, or are telecommuting for an established company, you may be looking forward to claiming home office tax deductions on your next return. But there is a good chance that you do not even qualify for these deductions.

The following is a brief outline of the requirements and restrictions that must be fulfilled to receive home office tax deductions.  For more information, you should consult “Publication 587: Business Use of Your Home,” put out by the IRS, as well as your tax consultant.

In order to know if you qualify for home office tax deductions, you need to consider the following questions:

1. How do you use the space in your home where you conduct business?

In order to qualify for a home office tax deduction, the part of your home that you work in must be regularly and exclusively used for business purposes. This space must fulfill at least one of the following three options:

1. It is your principal place of business. A factor that defines your home office as the principle place of business (even if you operate from other locations), is that it is the space where you exclusively perform managerial or administrative activities, such as billing, ordering supplies, or making appointments.

2. It is the location where you generally receive clients or customers.

3. It is a separate structure, such as a detached garage.

There are two exceptions to the requirement that your home office is used solely for business purposes:

1. You operate a licensed day care center in your home.

2. You store inventory or products for sale in your business.

Here personal use and business use may be mixed. If you are storing inventory, then keep in mind that you can only have mixed use of the area you use for storage if you do not have any other business location besides your home.

2. Are you a telecommuter?

If you are currently employed by and another company, but are working from home, then there are two additional requirements that you must fulfill to claim a home office tax deduction:

1. You must work at home for your employer’s convenience. This means that your employer does not provide office space, as can be the case with a telemarketer or call center operator.

2. You also can not be renting any part of your home to your employer and then using this space for service of your employer.

What is the Definition of Regular and Exclusive Use?

In order to qualify for the home office tax deduction, you need to be sure that you are fulfilling the requirement of regular and exclusive use of your home work space. To fulfill the “regular” requirement, the space must be used continuously, not just on occasion.

To fulfill the “exclusive” requirement, aside from the two exceptions mentioned above, you need to be sure that there is absolutely no mix of personal and business use. So, for example, the phone in your home office cannot be used for personal calls, nor the computer for personal emails. A consultant who meets clients and performs administrative activities in his dinning room, or in any room that has other uses, will also not qualify for a home office tax deduction.

As your home business begins to expand, you may end up out-growing your home office. Since moving a home-based business out of the house requires a substantial investment that will be a big draw on your cash flow, you need to first be aware of the signs that your current space is no longer doing the job.

The Warning Signs

1. You feel cramped With growth usually comes more workers, more equipment, and more papers. If you find yourself competing for space with any of these things, then it means you need a bigger physical set up. The more cramped you are, the more it will drive down your productivity.

2. Inadequate or unavailable facilities. As your business grows, you may find yourself needing space that does not exist at home, such as a conference room, or a reception area for customers. Certain equipment may also require special renovations that you cannot do in your house.

3. Strict Zoning Laws. If you live in a city with strict zoning laws, then you may be limited in terms of how many people you can hire or how often customers can meet with you at home since the increase in noise and decrease in parking may bother your neighbors. If this is putting a strain on your business, then it is another sign that it’s time to move elsewhere.

4. Location, location! Your location may be inconvenient for customers, (after all it is located in a residential area and not commercial one) and thus it may be hurting your sales.

5. Boundaries. If you start to see that boundaries are getting crossed between your work life and your home life, then this is also an important consideration. If family members seem to always “get in the way”, if customers or workers are seeing a bit too much of your house, if you seem agitated because being at home is a constant reminder of work, then take note. All of these are possible signs that it is time to move your home business out of the house.

As your home business begins to grow, the added work and responsibility may cause you to seek extra help. Once you have made the decision to no longer go on your own, you will have to decide whether to hire workers or outsource certain tasks. Knowing which option is right for you and your business will really depend on your specific circumstances.

Hiring Workers

Your fist instinct may have been to hire. So let’s take a look at some of the pluses and negatives.

Why to hire

• It’s personal. Bringing a hired worker into your home business means that you will have a personal relationship with this person. The worker may also be more enthusiastic about his or her job then an independent contractor.

• It’s an investment. You can also take comfort in knowing that he or she may be able to handle things not specifically connected to job, such as manning the office in case you suddenly get pulled away. A hired worker can multi task as part of the job description, or be trained to take on more responsibility in the future.

• It’s reassuring. Finally, by bringing hired workers into your home business, you will have more direct control and contact over your business operations.

Why not to hire

• You can’t afford it. One of the biggest reasons not to hire is the costs associated with it. If you are considering only part-time or temporary help, then these costs are not your concern. But if you are looking for full-time employees, then you will be responsible for several employer-paid taxes, in addition to any benefits, such as health insurance, paid time off, or sick leave.

• It’s a hassle. You have to go through a thorough hiring and recruiting process (See my article, “Home Business 101: Hiring Employees“)

• It may be against the law. If you live in a city with strict zoning laws, then it may not be so easy to hire on-site help. In some residential zones, all types of commerce are prohibited; others allow small non-polluting businesses that do not effect the neighbors (for example, through an increase of noise, or a decrease in parking spaces). Check with your local government to see how strict the zoning laws are in your area.

• It’s too crowded. Hiring workers means you must have adequate physical space to put them. If space is limited, then hiring may not be your best option.

Outsourcing

Now let’s take a look at outsourcing.

Why Outsource

• It’s cheap. When you hire an independent contractor, you avoid the added cost of taxes and benefits. This is particularly important if your cash flow is tight.

• No hassle. Unlike the lengthy recruiting and screening process needed to hire a worker for your home business, hiring an independent contractor is relatively easy. There are several options- online and off, where business owners can find the right independent contractor for the job. Moreover, there are many aspects of your business that can be outsourced, from bookkeeping to web design, even specific, short-term projects.

• No worries. With an independent contractor, there is no need to worry about zoning laws or the size of your home office.

The two major downsides of outsourcing are that you give up some control over these aspects of your business, and you miss out on investing in a workforce that could help you grow in the future.

In short, for home-based businesses with limited resources, outsourcing could be a better option. But if your business is growing rapidly, and you are looking for a something more personal, then hiring may be the right choice.