A Real Discussion About The Home Office Deduction

Home-based businesses are indeed on the rise. Working at home definitely has its advantages. Imagine a commute down the stairs, through the kitchen for goodies, with a leisurely look at television to catch up with the news of the day. And what if there is a sleepless night and an urge to get some work done comes about. Working would be better than viewing all of the get rich quick schemes monopolizing late night television. Owning a business can be very rewarding as the entrepreneur turns his or her own passion into a profit seeking venture. What of the cost savings associated with running a business from one’s very own home? Is this an advantage or a hindrance? Is the goal of this new business to expand, or just provide additional income? What are the tax benefits and consequences of running a business from our personal residence? As always my friends, I will leave no stone unturned as we embark on a journey of finding the truth in running a home-based business. Who’s way is better? My way is better friends. Read onward and explore the never before discussed issues of running your business from home, at least not in such creative and practical detail.

Working from home is a great way to keep overhead costs lower at the beginning. Imagine having to go out and secure office space and buying all new furniture and equipment. Saving these costs is desirable at the start of a new business venture. These cost savings, however, can create a problem, believe it or not. I am going to offer one of my classic examples to illustrate a very important point. Enter one start up electrical contractor setting up office from home. The key word in this sentence is start up. The intent of this particular contractor is to expand over time, hiring more electricians and eventually being able to lease warehouse space for tool and truck storage. Why is this an important consideration? Because my friends, bidding jobs is very important to this electrical contractor. With the goal of wanting to expand, it becomes necessary to factor in costs that will actually be present when the contractor is able to move the office. The new business owner should get the costs of future expansion and build it in to the current cost model. Bidding jobs with the lower cost model of running a business from home, may allow for our new contractor friend to beat the competition and secure new jobs. The competitors in the market place will likely have more costs built in to their respective bidding models. Ultimately, the home office business owner will move out and will also face a higher cost bidding model. The new home-based business owner should factor in costs that he or she expects to incur in the future, as well as actual expenses in existence currently. Customers should be exposed to higher rates currently as opposed to getting rate increases at a later date because cost structure has changed. This is true regardless of the business or industry one is entering. If expansion is the desire, factor in future costs to build reserves for expansion and get customers accustomed to higher rates from the very beginning.

Cost structure aside, what is tax deductible in a home office situation and how is the deduction determined? First, let us note that the home office deduction is its own separate calculation away from the other expenses of the business. The home office deduction will include: mortgage interest or rent, real estate taxes, utilities, maintenance expenses, insurance (mortgage and homeowners), capital improvements, and depreciation. In order to be eligible for this deduction, the home office must be used exclusively for business purposes. The business purpose includes seeing customers or patients (the revenue function takes place in the home office) , or the performance of administrative functions (bookkeeping, billing, customer service) because there is no other place to perform these tasks. The home office deduction is calculated after the profit fro the business id determined. Suppose that a business has a profit of $3,000 before taking the home office deduction. If the home office deduction is calculated to be $5,000, then only $3,000 of the home office expenses will be allowed during the current year. The remaining $2,000 will be carried forward. The home office deduction will not be permitted to create or increase a loss. If the business made $10,000 in the year as opposed to $3,000, then the entire $5,000 would be deductible as home office expense. IN this situation, the home office deduction reduces income tax exposure as well as the exposure to the self-employment tax.

To find out more about the home office deduction and how to calculate, go to my website at [http://www.mwibonline.com] and order my audio book on the home office deduction.

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Claiming Home Business Deductions

If you are among the growing number of people who work in a home based business then the privilege to claim home business deductions is for you. This line of allowable deductions with the internal revenue dues of a certain person or business entity are expenses that were either directly or indirectly made for the operation of the business. Among the direct expenses that falls as a deduction is the actual conversion of a certain part of the house to a business office or commercial rule. On the other hand, systems that were installed in to tighten the security as well as polishing the interior of an office fall as an indirect.

The internal revenue office is not actually concern about the category where the item or expenditure falls as they are more concern about validating the existence of the expenses as indicated in the statement. A person who is into this kind of business will have to undergo examination and inspection so as to effectively claim home business deductions. When declaring the expenses being claimed as deduction, you have to be very careful. The internal revenue office evaluates every claim and even inspects the place to know if the claims are valid.

When claiming for home business deductions, you must also attach official receipts and other documents that will prove the purchase of a certain item or the acquiring of a service. It would be easier for the officer who will be reviewing your claim to believe that the deduction is legitimate this way. The inclusion of photographs in the documents submitted is also helpful. Sometimes, actual inspection of the place is already dispensed with because of visual attachments.

Another thing that you must put in mind in claiming for home business deductions is the proper identification of items that can be charged as a deduction. Things that were made as an improvement to the rest of the house and is not being used as part of the business should not be indicated as a claim. You will never know when a revenue officer will land in your house and inspect. Once they found out that something is wrong, it could mean the outright denial of your claim for deduction.

Claiming for home business deductions may entail a lot of paper works. Aside from the regular forms that are filled up, there are still many other documents that have to be furnished the office that requires them. If you are just starting out in the business, it is best to learn early. After all, having this claim approved will benefit so much a home business and it will be worth all the time and money spent on it.

With the coming of home business deductions, a lot more people are re-considering the possibilities. Now, working just right at home is becoming very inviting to many. Not only that there is more freedom and creativity involved in it but that more and more support system is recognizing it. Now, people who take the risk are being rewarded in such an extraordinary way.

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Save Taxes by Claiming a Home Office Deduction

According to the IRS, the majority of American taxpayers working from home do not claim a home office deduction even though they’re entitled to it. This is because they are unfamiliar with the rules governing the deduction and they are wary of its record-keeping requirements. They are also afraid of being audited by the IRS, which commonly scrutinizes taxpayers claiming the deduction in order to deter underreporting of income by small businesses. However, as long as you are following the rules, your deduction should not give you any reason for concern of an IRS audit.

Determine your home office space

The part of your home you designate as your office must be used “exclusively” and “regularly” as your principal place of business, or as a place to meet with patients, clients or customers. However, there are 2 exceptions to the “exclusively” rule: (1) you are a qualified daycare provider using part of your home as a day-care facility, or (2) you use a portion of your home for inventory storage or product samples.

“Usually” is not the same as “exclusively”

“Exclusively” for business means you must use your home office space only for business all the time. You or your family cannot use the designated area for recreation purposes whatsoever; otherwise you are not qualified to take the deduction.

Principal place of business

Principal place of business means using your home office exclusively and regularly for administering or managing your business, such as dealing with and billing customers, clients or patients, as well as bookkeeping and writing reports.

Calculate the business percentage

There are two ways you can calculate the business-use percentage of your home. The first method is to divide the square footage (length x width) of your home office by the total area of your home. The second method divides the number of rooms used for business by the total number of rooms in your home. In order to use the second method, the rooms in your home must be approximately the same size.

Expenses you can deduct

You can fully deduct the cost of painting or repairs that pertain only to the business part of your home. You can deduct utilities, insurance, depreciation (if you own your home), rent (if you are paying rent), general repairs, and your security system based on the business percentage you calculated. You can also deduct real estate taxes, mortgage interest, qualified mortgage insurance premiums, and theft and casualty losses based on your business percentage, but these deductions are available to you even if you do not claim a home office deduction.

Home office in a structure not attached to your home

If your home office is in a separate structure not attached to your home, it does not have to be your principal place of business. However, it still must be used exclusively for business.

Home office deduction for employees

If you’re an employee working from home, you can claim the deduction if the exclusive and regular use of your home office is for the convenience of your employer. If you are renting part of your home used for business to your employer, then you are not allowed to take the deduction.

Report your deduction correctly on Form 1040

Self-employed taxpayers can use Form 8829 to determine their deduction and then report it on Schedule C, line 30. On the other hand, employees must itemize their deductions on Schedule A in order to claim the home office deduction and all other employee business expenses.

Maintain good records

Keep receipts and all other supporting documents of expenses relating to your home office. This includes documents to substantiate your home’s depreciable basis, such as purchase price, date acquired, and any improvements you made. You should keep your records for at least 3 years from the date you filed your tax return.

Take photographs

Take date-stamped photographs of your home office each year just in case you are audited. This is because you may claim the deduction on this year’s tax return but five years from now you might not even live in the same home. Date-stamped photographs will help you demonstrate to the IRS that you qualified for the deduction in the year it was taken.

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Save Cash With the Right Home Improvements

It may be the dog days of summer, but some of us are still thinking about unlocking our inner Bob Vila and fixing up our homes. Whether it’s building a new deck, remodeling our bathrooms, or just replacing some old windows, did you know you can save money when you make home improvements through tax deductions or tax credits?

Tax deductions reduce your taxable income, meaning you’re taxed at a lower income than you might have been taxed otherwise. It is subtracted “off-the-top” from the amount of money you made throughout the year, your gross income. Tax credits, on the other hand, directly reduce the tax you pay. They are dollar-for-dollar reductions which are subtracted from your tax liability. Both are widely used by eligible homeowners to save money on their home improvements.

If you’re wondering which improvements make you eligible for tax deductions or tax credits, it’s good to know how they are determined. If your improvements match any of these criteria, it’s a good bet they’re tax deductible or make you eligible for a home improvement tax credit.

Does it make your home more energy efficient?

There are a number of improvements that could fall under this category. These include energy-efficient exterior doors and windows, skylights, insulation, central air and heating, main air circulating fans, solar panels, solar-powered water heaters, and fuel cells. Look for ENERGY STAR-approved products, as many of them make you eligible for a home improvement tax credit.

Does it add value to your home?

Remodeling your kitchen or bathroom is the most common tax-deductible home improvement project. Other projects that add value to your home include finishing or re-modeling your basement, adding an addition, replacing the entire roof, paving the driveway, and major rewiring. Be aware that painting a room, replacing carpet, and fixing leaks or walls do not qualify for a tax deduction and do not add value to your home.

Does it enable your home to accommodate new uses?

Wheel chair ramps for the disabled, bathroom railings for those who need the support, elevators, and lowering light switches are all tax deductible. These improvements add function and make your home friendly to those who have a disability.

Remember, keeping the receipts and an accurate spending record of each improvement you have made will help reduce the potential taxable gain when selling your home. This will ensure that you are well prepared to defend your records in case of an audit. While it’s important to do research on your home improvement project, you should always consult a professional tax advisor for details.

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Determining a Home Improvement Deduction

Every time you think about it, you want an improved home. The expenses around you are just mounting, and you wonder if there is any relief. The government plans to give you some relief in the form of home improvement. Keep in mind that home improvement is not the same as repair, and both are two different things.

The Differences Are…

A home improvement would include anything like adding a fence, driveway, new room, swimming pool, garage, porch or deck. It can range from insulation to new heating and cooling systems. You can put work on your roof or landscaping in this area. This is considered a capital expense, and the government figures you will do this one time in your life. To get a home improvement deduction, you will need to know this information.

A home repair is different from home improvements in terms of a home improvement deduction. A repair is something you do to fix decay of your property, and you are spending to keep things fixed and under control as a repair is something that is done for pure damage control.
If you are deciding about a home improvement deduction, you’ll know repairs are categorized by repainting, anything that requires fixing, repairing leaks and replacing broken fixtures. You can bend some of the rules, and you can show your house as a home improvement. When you add a few things to your home, try to do it in a way that you can do some repairs that need to be done at the same time.

When Is a Good Time To Improve Your Home?

When you see a drop in the home rates, it is a good time to improve your home. You get the best of the rates. If you do it this way, you can deduct these expenses over the payments of your loan and save a lot. Your rates are also good for a home improvement deduction.
When it comes to a home improvement deduction, you have to remember if you use only some of the loan, only part of the loan is deductible. The remainder is deducted over the life of the mortgage that you have. When it comes to a home improvement deduction, you can save yourself even more money in the end of the year.

On the other hand, if you use only a portion of the loan you have taken, then the deduction is proportional. The remainder is deducted over the life of the mortgage. You must also remember that points which are not deducted by the year the loan is paid off are usually cent percent deductible in the payoff year.

When looking for a home improvement deduction, try to get the best you can out of it. If you improve the quality of your home, make sure you improve areas that need to be repaired. This way you can write it off as a home improvement deduction.

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