Home Businesses and Taxes

Did you kinda-sorta earn some extra money with a hobby and are thinking about starting your own small business?  Women are starting businesses at a fast pace, and many of them are home-based, running their businesses out of their home. It’s a great way to get started because it decreases the start-up and overhead costs.  A home business can also be a great tax deduction if you know the current tax laws regarding a home business.

 Home businesses need a dedicated location in the house.  It could be a desk in the den or dining room.  Some people set up in their garage for more space.  To keep the business separate from the rest of the household, you’ll want to find a space that can be used for business purposes only. There are lots of great ideas out there for turning a small space into an efficient work area.

In the past, it was easier to claim a home office deduction.  As long as the business was conducted in the home, business owners could claim a portion of their utility bills, mortgage payments, and other expenses.  Now, the rules are more defined and a business owner who works from home has more work to do to comply with the law.

 The last thing you want is for the tax man to cometh in the form of an audit from the IRS.  For anything and everything purchased for the business, file receipts and records of all business transactions.  In case your number does come up, you’ll be ready to prove what you have claimed.

 The most important rule to know is who can and cannot claim a home business on their taxes.  For the home business office, the area of the office has to be the primary location of the business.  This comes into play when people use offsite facilities for storage or some business activities.  The majority of the work has to be conducted in the home office.

 That is not all.  A home business office is required to be used exclusively for business.  Setting up a computer on the table in your living room is not going to cut it as a home business office if you move the computer every night so the family can eat dinner. 

 If the business meets these requirements, the home business owner is also entitled to deduct a portion of the household bills that are equal to the amount of space and time used by the business.  Add up the entire bill for each utility for the year and then deduct the qualifying percentage. This involves actually measuring the square feet that you are using for your office, and finding what percentage that is of your home’s total square footage.  

 Home businesses can claim other expenses.  Buying office supplies, inventory, and other necessities for the business can be itemized on the IRS business forms.  The entire business can be claimed as a loss if the expenses outweigh the income coming in.  The goal of business is to make money so hopefully the loss won’t last too many years.  

Once the business makes a profit it will be subject to paying quarterly taxes.  If you pay these taxes and the business claims a loss at the end of the year, those funds can be recouped.  Check with the IRS website  for more information

Best, Karen 

About Karen

Karen Karsten, CPCC, CAC, has had several business careers, in government, finance, retail and publishing. Each career was a building block that helped her create the life she has now as a coach, writer and executive director of Rich Chicks and Creative Principle of Think You Can LLC.

Her companies, Think You Can (www.thinkyoucan.net) and Rich Chicks (www.richchicks.org) both explore the magic of prosperity and creating clarity about life values. Karen has total faith in the magic of belief. Notice how that works either way: belief of magic, magic of belief. Magic is there—in you, too. Take a moment right now and honor the magic in you.

Comments

  1. As a recently published author, I’m going to hope to make a profit soon or I will just be considered a hobbyist and there will be no tax advantages. Thanks for the post.

  2. It’s a pleasure to finally meet the executive director of Rich Chicks!! I’m a close friend of Michele and she speaks quite highly of your organization. I’m in EC and wish I lived closer so I could be more involved. Thanks for the tips on taxes. I am blessed enough to have a private room in my home to use as an office and for workshops. One thing I would like to get is a smart phone for my business. Right now I use a land line and have a trac phone and have heard that cell phones are not deductible for business. Have you heard anything on this topic?

    • Thanks for reading my post, Julie. I think I did meet you briefly a while ago. Look forward to meeting you some time soon. K3

    • The IRS has a GREAT handout on the writeoffs available for work. Obama invested a TON of resources into the IRS website and here is the PLUS they are super user friendly. They have a guidebook to download as well.
      IRS.gov
      Many business owners use a cell phone as a primary line and that IS a write off. The quandry is when personal and business are mixed, and how to write off the mix of those two. Tax people always have a view point. If you forward calls from a hard phone to a cellphone it IS a write off as well.
      A guide is this- tools that allow you to do business are a write off.
      They may just be less that ALL when it is mixed use so avoid mixed use.

  3. Great post. This is a topic on many of our minds this time of year and any tips are much appreciated!

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