Home Based Businesses can be Effective Tax Shelters!

Learn about the definition and requirements of a home
based business.  What is deductible?  Is there a limitation you
can deduct?  Also learn about the tax advantages of running
a daycare center!




Home Businesses as Tax Shelters
 Home base businesses are wonderful tax shelters.  If you use a
room or other space as an office in your home you may be able to
deduct expenses such as utilities, insurance, repairs, and
depreciation allocated to your business use of the given area.  If
you have a home business you may also be able to deduct
business vacations, cars, and meals with colleagues as
deductions as well.  These are outside the scope of this site.  We
will focus on the business use of your home itself.

Definition
 Per IRS Publication 587, "Business Use of Your Home", the IRS
term "home" includes a house, apartment, condominium, mobile
home, or boat.  It also includes structures on the property, such as
an unattached garage, studio, barn, or greenhouse.  It does not
include any part of your property used exclusively as a hotel or inn.

Note that if you think the IRS will not come to your house to examine
your office to determine if you are actually using a portion of your
home exclusively for business, think again!  An IRS agent may pay
you a visit.  Although the odds are small, it's best that you remove
all personal items OUT of the home office area.  Don't play games
on your computer, get rid of all books and literature not related to
your business, and remove all non-essential furniture (couch, futon,
etc..).  When in doubt, place all non business related items in
another room.

Requirements
 To qualify to claim expenses for the business use of your home
you must meet each of the following tests:
 

  1. Exclusive Use
  2. Regular Use - You must use a specific area of your home
    for business on a continuing basis, not from time to time as
    you please.
  3. For your trade or business - You must use part of you
    home in connection with a trade or business.  If you use your
    home for a profit seeking activity that is not a trade or
    business, you cannot take a deduction for its business use.

    Example:  If you carry out investment activities related to
    your own investments, you cannot take the deduction for the
    business use of you home because you don't make
    investments as a broker or dealer.

The business part of you home must be one of the following:

  1. Principal Place of Business
  2. A place where you meet or deal with patients, clients, or
    customers in the normal course of your trade or business.
  3. A separate structure (not attached to your home) you use in
    connection with your trade or business

Note that if you are an employee and you use part of your home for
business, you may qualify for a deduction for the business use of
your home if you meet the tests above plus:

  1. Your business use must be for the convenience of your
    employer.  This means that your employer does not
    provide you with a place to work.  So, if you are an
    employee and could do work at the employer's office but
    decide to work at home because it is convenient for you,
    you do not qualify for a home business deduction.
     
  2. You do not rent any part of your home to your employer and
    use the rented portion to perform services as an employee.

Multiple Business Use of a Home Office
If you use a home office for more than one business you need to
make sure that the home office tests are met for all businesses.  If
one business use qualifies and another business use does not, the
IRS will disallow deductions including the qualifying one. 

Expenses That Are Deductible

  • Depreciation
  • Home Mortgage Interest
  • Real Estate Taxes
  • Utilities
  • Trash and snow removal
  • Repair
  • Maintenance
  • Homeowner's insurance costs
  • HOA fees

To learn more about home business expenses that are deductible,
visit our home business expenses examples page.


Business Percentage
If you qualify for the home business deductions you will need to
determine how much you can deduct.  You must figure the
percentage of your home used for business.

Learn about determining the business percentage use of
your home here

Net Income Limitation
 If your gross income from the business use of your home is less than
your total business expenses, your deduction for certain expenses for
the business use of your home is limited.

Learn more about the Home Business Deduction Limit here

Daycare facility
If you use space in your home on a regular basis for providing
daycare, you may be able to deduct the business expenses for
that part of your home even though you use the same space for
non-business purposes.

Learn all about the daycare facility deduction here

Part-Year Use
You cannot deduct expenses for the business use of your home incurred
during any part of the year you did not use your home for business
purposes.  For example, if you begin using part of your home for business
on July 1, and you meet all the tests from that date until the end of the
year, consider only your expenses for the last half of the year in figuring
your allowable deduction.

Separate Structure
 You can deduct expenses for a separate free-standing structure, such
as a studio, garage, or barn, if you use it exclusively and regularly for
your business.  The structure does not have to be your principal place
of business or a place where you meet patients, clients, or customers.

Example:  Karl Eggertsen operates a floral shop in Valencia, California.
He grows the plants for his shop in a greenhouse behind his home.  He
uses the greenhouse exclusively and regularly in his business, so he can
deduct the expenses for its use, subject to the deduction limit.
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