Millions of Americans Are Now Home-Based Business Owners. And Many Can Take Advantage of the Home-Office Tax Deduction.
By Mike Foley
The 1990s saw a large increase in home-based businesses, as developments in technology and the Internet made it far easier to work from home. According to the U.S. Small Business Administration, around 53 percent of small business in the United States is home based. And it's now estimated that approximately 40 million American households contain some form of a home office.
With tax season approaching, it's important to remember that owners of small, home-based business may be able to deduct the expenses related to their home offices. But what are those expenses? And how can you determine if your home office qualifies for the deduction?
DEFINITION OF A HOME OFFICE
Although millions of people now work at home, only a portion of those have set up specific office space dedicated to the business. Many, in fact, work only from a kitchen table or the corner of a bedroom. But you can't put a computer in your bedroom, use it infrequently, and deduct that space as a home office.
Your home office space must fit a strict criteria:
* The area must be used regularly and exclusively for your business* It must be your PRINCIPAL place of business, where you consult with clients or customers, treat patients, etc.
* It must be the exclusive, regular space for the administrative and management activities of your business (ordering supplies and equipment, billing, bookkeeping, making appointments, etc.)
A home office that meets the above criteria is usually a room within your home, however at times, a detached structure (such as a guest house) can be used as an office and may also meet the definition of a home office.
POSSIBLE DEDUCTIONS
Because the office is a portion of your home, you can write off a percentage of your home expenses. That percentage is based upon the square footage of your office space. For example, if your home has a total of 2,000 square feet and your home office area is 200 square feet, your office represents 10 percent of your home area. As a result, you would be entitled to write off 10 percent of normal home expenses. These might include:
* Rent* Insurance
* Utilities
* Deductible Mortgage Interest
* Real Estate Taxes
* Repairs
* Painting
Be aware that the home office deduction is also dependent on your business income. For example, if that income is less than the total of all your business expenses, your home office deduction will be limited.
To fully understand your individual situation and the home-office deduction you may be entitled to, consult your personal tax professional.
Mike Foley, editor of the Dream Merchant, is also a freelance writer and teaches writing classes in the extesion program at UC-Riverside.
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