Four Common Tax Myths All Home Business Owners Should Be Aware Of

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Four Common Tax Myths All Home Business Owners Should
Be Aware Of.

- by Todd Jensen

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The home office deduction gets a bad wrap. There are
so many rumors out about the home office deduction that
you may want to avoid the whole subject. But if you
have a home office and aren’t deducting it, you could
be missing out on some very valuable tax savings.
Let’s take a look at the truth behind the myths about
the home office deduction.

Myth Number 1 - The home office deduction is a red flag
for an audit.

Twenty years ago, this might have been true, simply
because it was unusual. Now, the home business seems
to be almost as popular as home ownership! Millions of
individuals operate some kind of business activity out
of their homes. Others telecommute, and deduct their
home office expense as an itemized deduction. The home
office deduction is no longer an automatic flag for an
audit.

The key to avoiding an audit is reasonableness. The
IRS uses computer analysis on all tax returns. Any
deduction that is excessive on your income and the
benchmarks for your industry may be questioned.

Bottom line: Deducting a portion of your home expenses
as a cost to operate your home-based business is
expected!

Myth Number 2 - If I take a home office deduction, I can
deduct all the costs of my home.

You deduct a portion of your home expenses as a home
office expense based on the square footage of your home
office space. If you have a 2000 square foot home, and
a 200 square foot office, you could deduct 10% of your
home expenses.

Unless you operate a day care center, your home office
space must be exclusively used for business. Your
kitchen will not qualify as home office space simply
because you use the table to complete paperwork. If
you use the space for personal and business, it does
not qualify.

The easiest way to keep track of this is to designate a
room or rooms for home office purposes. If you don’t
have a complete room to use as office space, use
furniture to separate the personal part from the
business space.

Of course, there is an exception to this rule. If your
business is wholesale or retail and you do not have any
other fixed location, you can include any space you use
for storage of inventory or product samples as part of
your home office. This space does not need to be used
exclusively, but must be used regularly, and be
suitable for storage.

Bottom line: Calculate the square footage you use
exclusively for business and the square footage of your
storage space for inventory to determine your home
office deduction.

Myth Number 3 - I can only take the home office deduction
if I work at home exclusively.

Old rule! Congress expanded the home office deduction
to allow business owners without any other fixed
business location to take a home office deduction
regardless of the number of hours they spend at home.
If you provide services to customers or clients at
their location, you can still qualify for the home
office deduction. You simply must use your home office
for administrative and management duties.

Bottom line: You can deduct your home office as long
as you don’t pay for other office space to run your
business.

Myth Number 4 - The home office deduction will make me
lose my tax exclusion on the sale of my home.

The rules have changed here, too. If you use 10% of
your home for business purposes, you no longer have to
recognize 10% of the gain on the sale that could have
been excluded if you meet the requirements for the sale
of your principal residence.

What you do need to do, however, is include any
depreciation deduction you took in prior years as a
taxable capital gain. You still benefit, because your
capital gain rate is most likely lower than your
ordinary income tax rate. You are able to take the
original depreciation deduction at ordinary income tax
rates, and bring it back into income when you sell your
home at the lower capital gain rate. Your depreciation
deduction can also reduce your self-employment taxes.

Bottom line: You can still save taxes overall by
taking the home office depreciation deduction each
year.

Operating your business from home is a very smart move
financially for the new or small business owner. You
can save yourself thousands of dollars in rent by
operating at home rather than renting business space.

But the cost of housing your business is an expense,
and should be treated that way. You would not hesitate
to deduct rent expense for your business. Treat your
home business expense the same way. The tax money you
save can be used to grow your business, or even to fund
your family vacation! Talk to your tax preparer if you
have more questions, and get ready to take that home
office deduction on your next tax return!

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Todd Jensen, “The Profit Engineer”, has helped hundreds
of business owners make their business more successful
and profitable. For tips and strategies on how to
boost your business success as well as increase your profits,
visit
http://www.theprofitengineer.com or
http://www.freebusinessstartupinfo.com
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