Running your business from your home can help you take advantage of tax deductions to make the most of your income. Qualifying for those tax deductions will require research into IRS rules backed by good records of your expenses.
Start your research by visiting the IRS (Internal Revenue Service) IRS website at IRS.gov
and searching for IRS Publication 587
, “Business Use of Your Home
Generally, the IRS requires that you use a specific section of your home “exclusively and regularly” for business purposes to qualify for tax deductions. That may be a room or even a designated portion of a room reserved for business use. Special rules apply if you use your home for specific storage purposes, for rental use, or as a day-care facility.
Types of Expenses
Home-based business deductions can be linked to direct or indirect home expenses.
- Direct expenses are related solely to business operations, such as a second telephone line used only for business purposes. The full amount typically is deductible.
- Indirect expenses reflect the business’ share of home expenses such as heating, garbage pick-up, and property taxes.
In general, the amount of indirect, home-related expenses that you can deduct is based on the percentage of your home used for business. So if 10% of your house is reserved for business use, you can deduct 10% of qualifying “indirect” expenses.
The Depreciation Issue
You also can take a deduction for depreciation to reflect wear and tear on your home. This deduction is based on both the home’s value and the portion of the home used for the business.
If you claim indirect expenses and later sell your house, the IRS reduces the amount of the capital gains exemption on your home sale profits by the amount of depreciation that could have been claimed, even if you never claimed a depreciation deduction.
The only way to avoid this potential issue is to never deduct indirect expenses. In many cases, however, the benefit from annual deductions now outweighs potential taxes on the profits of home sales later.
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