# Tax Deductions for Home-Based Businesses

### Two Kinds of Home Business Deductions

Your home business can take two kinds of deductions. There are deductions you and all other businesses can take, and there are deductions that you must qualify for as a home business. The primary home business deduction is for your business space, and there's a two-step process for deducting the use of your space.

After you are sure your home business spaces is qualified for the deduction, you can determine the method to use and

• ### 01 Understand the Principal Place of Business Concept

If your home is your only business location, it's easy to show that it's your principal place of business. But if you work at home and in an office, you will need to consider two factors:

• The relative importance of each location and
• The amount of time you spend at each location.

The IRS considers both of these factors, so you will need to be able to support your claim that your home is your principal place of business. Keep track of what you do for your business at home (work on the computer, see clients) and the amount of time you spend at home vs. an office.

• ### 02 New Alternative: Simplified Home Office Space Calculation Method

The IRS has announced a new simpler calculation method for home office space deductions. You can deduct home business costs for the space used "regularly and exclusively" for your home business, using the old calculation or the new simpler method. If you have a smaller space, the simple method can save you time and mistakes.

The simple method is best for smaller locations. You can deduct \$5 a square foot for up to 300 square feet, for a maximum of \$1,500 a year.

The advantage of this method is that you don't have to keep track of all your home expenses and run calculations to figure the percentage. You can't take a depreciation deduction when you use the simplified method but it's a method for a small area.

In brief, the process involves:

• Figuring the space you will be using for your deduction and the usable space of your home.
• Listing all home expenses that can be used to calculate your deduction. Some are direct and some indirect.
• Trying out both the simple and detailed calculation methods to see which is best for your home business.

• ### 04 Use Form 8829 to Calculate Home Based Business Expenses

Once you have decided to use the detailed method to calculate your home business deduction, it's time to begin working To correctly calculate deductions for business use of your home, you will need to use Form 8829. The process of completing Form 8829 is in steps;

• Part I calculates the percentage of your home used for business.
• In Part II you will enter both direct and indirect expenses for your home business space.
• Part III is the calculation of depreciation. (You can't use depreciation if you are using the simplified method.)
• Part IV is a carryover of expenses for another year.

• ### 05 Prepare for an IRS Audit of Your Home Business

There's a myth going around that the IRS targets home businesses. While this isn't true, having a home business means you should be prepared if indeed the IRS comes to your home to inspect your home business.

The IRS wants to be sure you are not violating the requirement that your home office is used "regularly and exclusively" for business purposes.  CPA Gail Rosen answers some questions about the use of the home office.

• ### 06 Limits on Home Based Business Deductions

Home based business deductions are limited.  You can deduct home business expenses to reduce y our business income for the year, but you can't take these deductions if they result in a business loss. The calculation for this limit is complicated, and it is included in the article link above.