Home Office Info/FAQ:

New Safe Harbor method! - In IRS Revenue Procedure 2013-13, the IRS has a new safe harbor method for small business owners to calculate their home office deduction. The requirements that the area of the home still be used regularly and exclusively for business still apply. In addition to mortgage interest and real estate taxes (which do not get allocated between business and personal under this method), a new $5.00 per square safe harbor deduction (max 300 Square feet or $1,500) may be taken instead of depreciation, utilities, insurance, and upkeep.

I heard about all the tax benefits of running a business from my home and am ready to get started.  I'm wondering if I should start a business? The large multi-level marketing companies have a tendency to overstate the tax advantages of starting a small home based business. Don't make your decision based primarily upon perceived tax advantages. 

How are the benefits of a home based business overstated?  Few new home based businesses will qualify for the widely touted  "home office deduction" because in order to deduct the costs of a home office, stringent requirements must be met first. Few new home based businesses will qualify for this deduction.

What are the requirements in order to deduct the costs associated with my home based business?  You must operate the home based business much as a regular business is presumed to be operated - for a profit. Your home based business should keep records and have a marketing plan.

I don't intend to make a profit. I just enjoy having parties!  Your business may be classified as a hobby. Expenses may be used to offset income only and reported on Schedule A as a hobby expense. (Income is reported on Line 21). 

How should I keep records for my home based business?  Buy a spiral notebook (cost less than $2) and keep an income page. On the income page record ALL receipts, including those from customers and the company if you are associated with a multi-level. On separate pages, keep track of the major expense categories. On a separate page, track all payments to the multi level company for products, kits, fees, supplies etc. You don't need to use Quick books. Total up the income and expenses on each page and if you wish use our checklist to summarize the items for the tax return.

How does mileage affect my business?  Use our mileage info checklist to keep track of business related trips in your car. Using the standard mileage rate is the easiest way to calculate the deduction.

What other types of situations (besides multi-level) are considered home based? If you meet with clients or work out of your home, you may qualify as a home based business.

When a home office deduction is justified, how is it calculated?  See the section on home office expenses on the checklist. The cost (or value) whichever is lower, are used to set up a depreciation schedule for the home office use percentage. 

What do I need to know if I am starting up a daycare business?  It is easier to deduct business use of the home, however, the record keeping can be onerous. Please contact me for a consultation to discuss other specifics of operating a daycare business.

Advice:  If income is small the first year or two, keep expenses in check as large deductions may
be disallowed by the IRS unless you can prove you had a profit motive.

Is the first telephone line into the home deductible?  NO

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Many work from home, few qualify for a home office deduction.

Todd's Tax Service LLC