Looking to maximize tax deductions for your home-based business?
Entrepreneurs who work from home are entitled to certain deductions that other small businesses cannot take. The key is understanding the full breadth of your deductions so you're not missing out on any tax savings, say experts.
"You have to redouble your efforts looking for deductions," says Rudy Lewis, president of the Baltimore-based National Association of Home-Based Businesses and a home-based entrepreneur. "Normally a lot of things you would take for granted in better times."
For starters, if you operate a business exclusively from home, you may be entitled to the home-office deduction (see irs.gov) on certain expenses including a portion of your real estate taxes, mortgage interest and maintenance expenses, explains Alan Yates, senior tax partner at Nussbaum Yates Berg Klein & Wolpow Llp in Melville.
To qualify, you must be using a part of your home exclusively and regularly for business, according to Barbara Weltman, a small-business tax specialist in Millwood, and author of "J.K. Lasser's Small Business Taxes" 2010 (Wiley, $18.95).
The deduction is based on the percentage of your home used for business, Yates notes. For instance, if your office is 300 square feet and your home is 3,000 square feet, your office takes up 10 percent of your home's space and would constitute that portion of deductible expenses, says Yates.
"It doesn't have to be an entire room," Weltman says. "It could be a desk in the corner of your family room."
But that desk would have to be used strictly and solely for business, she notes.
Red flag. Many entrepreneurs are afraid to take this deduction because they feel it might trigger an audit, says Arnold Haskell, a tax partner at Holtz Rubenstein Reminick in Melville.
The Internal Revenue Service does not keep specific stats on home-based business audits.
"It's generally an item the IRS has been known to scrutinize because there are restrictions," Haskell says. Still, if you legitimately qualify for it, you should be taking it, he adds.
If you claim the home-office deduction, you can write off certain costs related to office improvements and equipment purchases over a period of time, generally from 3 to 39 years, depending upon the nature of improvements, says Haskell.
Travel. You also can deduct travel to and from home for business purposes, adds Weltman. You can take a mileage deduction (55 cents per mile for 2009) or deduct the expense of operating the vehicle for business use.
Just make sure you document where you traveled, the date and for what purpose, says Weltman. The same goes for any meal/entertainment expenses.
"I put every single receipt for each month in an envelope," says Lewis, who keeps 12 months' worth of envelopes. "You've got to be careful."
The bottom line is you don't want to take deductions you're not entitled to or underestimate deductions you're legitimately owed, Yates says.
"I find people tend to underestimate rather than overestimate," he notes. So keep good records.
Other deductions. And remember, even if you don't take the home-office deduction, you're still entitled to some other write-offs, says Yates, including:
Cell phone and Internet use. Calculate the portion allocated for business purposes, he notes.
1. Advertising costs
2. Business insurance premiums
3. Returned checks and bank fees
4. Credit card fees
5. Start-up costs: deductible up to $5,000 in the year in which the business begins, he says.
Check with your accountant for other possible write-offs. "Don't leave your deductions at the door," Haskell says.
Common home-based tax mistakes
1. Not keeping good records/receipts
2. Missing deductions
3. Overstating deductions
4. Not separating your business from personal space to qualify for home office deduction
Source: Arnold Haskell