|
|
|
Keeping the Bacon
Tax breaks for home-based business owners
|
Business New Haven
11/6/1995
By: BNH
|
Operating a home-based business may entitle you to special tax breaks that can help maximize your income and offset day-to-day expenses of maintaining your home and office. If your home-based business meets certain guidelines, you may be able to deduct business expenses for your car, personal equipment and entertainment, as well as a portion of mortgage interest, property taxes, utilities and other costs associated with home ownership.
Unlike employee business expenses that are subject to the two-percent of adjusted gross income limitation, you can deduct qualified home-based business expenses in full on your individual income tax return. But before you start dreaming of tax write-offs, you'll need to be sure your home-based business qualifies.
The challenge is to distinguish your business from a hobby. Generally, a home-based business is entered into with the primary intent to make a profit, while a hobby is pursued without the intention to make a profit (although your hobby may incidentally produce income). In general, an activity is presumed not to be a hobby if profits result in three or more of the five consecutive tax years up to the current year, unless the IRS proves otherwise,
Business expenses must be “ordinary” and “necessary” to qualify as deductions. An “ordinary” expense is one that is common and usual for your type of business, trade or profession, while a “necessary” expense is defined as “appropriate” or “helpful” for your particular business.
If you use your automobile in connection with your home-based business, you may claim a deduction equal to 30 cents per mile plus the business portion of parking, fees and tolls, or write off the actual costs of operating your automobile in connection with your business. These costs include gas, oil, tolls, parking, depreciation, and maintenance expenses. Keep in mind that if you lease a car for business purposes, you must use the actual-cost method.
Tax law allows a business to deduct up to $17,500 in qualifying property in the year the property is placed in service, rather than depreciating the cost over a period of years. If you are in need of new equipment, consider the benefits of immediate expensing. Be aware that the expensing deduction is phased out once the cost of the property placed in service during the year exceeds $200,000.
In some cases, home-based business owners find it more cost-effective to lease a business asset. If the leased asset is used strictly for business purposes, you generally can deduct the entire leasing expense; When the asset is used for both business and personal use, only the portion attributable to business use is deductible.
You can deduct 50 percent of the cost of business-related meal and entertainment expenses incurred in entertaining a client, customer or employee. To qualify, a bona fide business discussion must take place immediately before, during or immediately after the meal or entertainment. Also, your records of business meals and entertainment must reflect the amount, time, place and business purpose of the expense, as well as your business relationship with the person entertained.
You may qualify to deduct the costs of operating and maintaining the portion of the home you use for business only if your home office is used regularly and exclusively as 1) your principal place of business, or 2) a place where you routinely meet customers, clients or patients. You will not meet the exclusive-use test if the business portion of your residence is not used solely for the purpose of carrying on your business. To claim these deductions, you must tile Form 8829.
Finally, when you operate a home-based business, you take on a number of other financial responsibilities, such as paying estimated taxes, insuring your business, and creating retirement savings plans. BNH
This column was prepared and provided by the Connecticut Society of Certified Public Accountants.
|
Go FirstGo PreviousGo
NextGo LastGo
to Index
|
|
