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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.

One of the major ways to capitalize on small business tax deductions is by coordinating the purchase and sale of equipment and furniture. Maximizing the tax deductions associated with equipment and furniture requires proper foresight, but promises significant financial rewards.

In general, small business owners should seek to purchase office equipment and furniture towards the end of the fiscal year and sell old assets after the current fiscal year has ended. By purchasing new equipment before the year ends, a portion of the purchase price can be immediately claimed as a write off. Alternatively, you can begin to write off the cost slowly over several years. Any old or outdated equipment that was not yet completely written off will still provide your business with a deductible depreciation expense. Therefore, it is wise to hold off selling it until the year comes to an end.

Immediate Write Off Versus Depreciation

In section 179 of the tax code, it states that a small business has the option to entirely write off most of its new equipment and furniture in the year that it is put into service rather than depreciating it over a few years. This is an attractive option for many small businesses seeking to quickly increase their cash flow.

A business is not required to pay the whole cost of the equipment to claim this deduction. This means that equipment and furniture that was purchased on credit, yet put into use before the end of the year is still eligible for the deduction.

There is a limit, however, to how much equipment you can purchase and claim. Check with your tax consultant to get the current figures for your small business. Moreover, in order for a small business to get the deduction, it has to be profitable. Small businesses without profits can not deduct the first year depreciation deduction, although they have the option to carry it forward to later profitable years.

A new small business, therefore, could opt for the depreciation method that is spread out over a few years. That way, most of the deductions will be available when the business has income and is in a higher tax bracket.

It should be noted, that if you have a C-corporation, an LLC, an S-corporation or a partnership, you may be able to utilize a Section-179 deduction in both your business’ taxes and your personal income taxes. Many states also allow smaller deductions, so be sure to consult with your tax consultant.

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Many small business owners do not start thinking about their income tax deductions until December 31st draws near. Then, with the end of the year around the corner, there is a sudden flurry of activity as they scramble to increase their deductible expenses.

Small businesses, which often deal with tight cash flows and small profit margins, stand to benefit a lot from a full reduction in their tax payments. But to do so requires planning and foresight that really extends throughout the year.

Here are several tips on what you can do at the end of the year and throughout it, to maximize your small business’ tax deductions. Since the conditions may vary depending on the unique circumstances of your business, you should consult with an accountant or professional tax consultant before making any decisions.

1. Efficient financial accounting. Before we can talk about how to maximize your small business tax deductions, you need to have an accurate picture of your company’s financial situation. Your books should be clear and up to date. You should also have a system for collecting and filing any receipts for business expenses. Finally, you need to be on top of your cash flow, namely accounts payable, accounts receivable, and inventory.

2. Hire a tax consultant. Hiring an accountant or a tax consultant, is good business practice- especially if you are unfamiliar with basic business accounting. Hiring such a professional is also a tax-deductible business expense, and the tax advice you will receive should help pay for the cost.

3. Increase your expenses. By increasing your expenses before the year ends you can maximize deductions for this year. Obviously, you will be limited by your available cash flow. If there is money available then you could do the following:

• Purchase items your business will require in the immediate future, such as office supplies
• Pay any outstanding bills, such as rent or utilities, early
• Take care of any repairs or maintenance that you have been putting off
• Make any business trips to existing or potential customers

4. Make year-end equipment purchases. If plan on buying buying new office equipment or furniture, then consider purchasing it at the end of the year. You will then have to decide whether you want an immediate write off or a depreciation that is spread out over the next few years. Keep in mind that to claim the deduction, your equipment needs to be set up and in use by year-end.

5. Delay or defer income. Any income that is expected in December, but can be deferred to January, will lower your yearly business income. If your income is smaller, then the taxes you will have to pay will be accordingly reduced.

6. Contribute to a retirement plan. Making payments to a retirement plan is another good way to reduce your tax obligation. If you do not currently have a retirement plan then consider setting one up before the end of the year. In the US there are several plans to choose from, each with their own terms and conditions, so make sure to check these out beforehand.

Small business owners looking to take advantage of income tax deductions should be familiar with the expenses they are entitled to claim. The following checklist can help you become aware of what constitutes a tax deductible expense.

It should be noted, however, that the complete list of deductible expenses is actually quite extensive and may vary depending on the unique circumstances of your business. Therefore, before making any decisions, you should consult with your accountant or professional tax consultant.

• Advertising and Promotional Expenses
• Banking Fees Including:check charges, monthly charges, bank wire fees or overdraft fees.
• Business Gifts
• Business-Related Education, such as seminars, classes, and educational tapes or video
• Charitable Contributions
• Conference and Convention fees
• Equipment and Furniture This includes the cost of the equipment, furniture, or vehicle purchased, as well as depreciation on old equipment, and lease payments
• Health-Insurance Premiums
• Insurance (for buildings, machinery or equipment)
• Interest and Fees (on money borrowed for the business)
• Losses Losses from theft, fraud, damage from natural disasters
• Meals and Entertainment
• Membership Dues
• Moving Expenses
• Office Rent Expenses
• Office Supplies
• Postage and Shipping Expenses
• Professional Fees Including: legal help, accounting and bookkeeping, architectural, business consulting and marketing consulting)
• Property Taxes
• Repair and Maintenance On the building, grounds, and equipment
• Retirement Accounts for self and employees
• Salaries of Employees
• Software Costs
• Taxes This includes: sales tax on items purchased for business usage, real estate tax on business property, employer’s share of employment taxes, excise taxes and, in some instances, state income tax
• Telephone and Telecommunications Expenses Including, Internet, television and other communication usage for business purposes
• Trade-show exhibition and/or attendance Including travel, meals, admission fees and costs of booths or exhibitions.
• Travel This includes: automobile expenses pertaining to business usage, using either actual costs of repair and gas or the standard mileage deduction, hotels, airfare, meals, laundry and business entertainment while on the road. You can also claim the costs of passports for self and employees when traveling for business purposes
• Utilities