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.