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Are you afraid to take advantage of the home office deduction? Perhaps you are the victim of one or more of these common tax myths. Unfortunately, many self-employed folks shy away from taking the home office deductions for at least one of the following four reasons. 1. Fear of an IRS audit. There’s been a rumor going around for years that the home office deduction increases the likelihood of an audit. I would love to know who started that rumor so I could give him a piece of my mind. For now, I’ll just be thankful that you are reading this article so I can tell you: don’t believe it! There is no basis for it. Treat the home office deduction like any other legitimate business expense: if you are entitled to take, by all means, take it. 2. Frustration over the record keeping requirements. Obviously, there are some numbers that must be compiled to take the home office deduction. For homeowners, they include the following: mortgage interest, real estate taxes, homeowner’s insurance, utilities (gas, electricity, water, trash removal, etc.) and repairs. The first two are usually reported to you on your lender’s annual Form 1098 statement. The utilities are easy to calculate by simply adding together your twelve monthly bills for each service provider; if you don’t have those bills, the amounts are just a phone call away to your friendly utility company. And home repairs are easily found by looking through your checkbook register and/or monthly credit card statements. For renters, there’s usually fewer numbers to crunch: the rent amount is the main figure, and I’m sure you know that without even looking it up. You also need any renter’s insurance or utilities you paid. 3.The belief that it’s not worth it. When you consider that there is likely hundreds or even thousands of dollars in tax savings at stake, don’t you think this is time well spent? If it takes you an hour to put this information together, and you save $500, where else can you make that much money in that amount of time? Sure, I know how much some people despise paperwork and number crunching. Maybe you prefer not to touch a calculator with a 10-foot pole. If that’s the case, hire an accountant to do your return and the extra tax savings from this deduction alone will likely more than cover the tax preparation fee. 4. A misunderstanding of the tax benefits. Have you ever heard a person say that he’s not taking the home office deduction because he’s already deducting mortgage interest and property taxes on Schedule A? Well, the next time you see your friend, dazzle him with this tax strategy wisdom: If you take the home office deduction, you not only reduce your income tax, but you are also reducing your self-employment (SE) tax. This is because the home office deduction reduces your Schedule C profit. For every $1,000 of home office expense, you are losing about $150 in SE tax savings.

Home-based businesses are indeed on the rise. Working at home definitely has its advantages. Imagine a commute down the stairs, through the kitchen for goodies, with a leisurely look at television to catch up with the news of the day. And what if there is a sleepless night and an urge to get some work done comes about. Working would be better than viewing all of the get rich quick schemes monopolizing late night television. Owning a business can be very rewarding as the entrepreneur turns his or her own passion into a profit seeking venture. What of the cost savings associated with running a business from one?s very own home? Is this an advantage or a hindrance? Is the goal of this new business to expand, or just provide additional income? What are the tax benefits and consequences of running a business from our personal residence? As always my friends, I will leave no stone unturned as we embark on a journey of finding the truth in running a home-based business. Who?s way is better? My way is better friends. Read onward and explore the never before discussed issues of running your business from home, at least not in such creative and practical detail.

Working from home is a great way to keep overhead costs lower at the beginning. Imagine having to go out and secure office space and buying all new furniture and equipment. Saving these costs is desirable at the start of a new business venture. These cost savings, however, can create a problem, believe it or not. I am going to offer one of my classic examples to illustrate a very important point. Enter one start up electrical contractor setting up office from home. The key word in this sentence is start up. The intent of this particular contractor is to expand over time, hiring more electricians and eventually being able to lease warehouse space for tool and truck storage. Why is this an important consideration? Because my friends, bidding jobs is very important to this electrical contractor. With the goal of wanting to expand, it becomes necessary to factor in costs that will actually be present when the contractor is able to move the office. The new business owner should get the costs of future expansion and build it in to the current cost model. Bidding jobs with the lower cost model of running a business from home, may allow for our new contractor friend to beat the competition and secure new jobs. The competitors in the market place will likely have more costs built in to their respective bidding models. Ultimately, the home office business owner will move out and will also face a higher cost bidding model. The new home-based business owner should factor in costs that he or she expects to incur in the future, as well as actual expenses in existence currently. Customers should be exposed to higher rates currently as opposed to getting rate increases at a later date because cost structure has changed. This is true regardless of the business or industry one is entering. If expansion is the desire, factor in future costs to build reserves for expansion and get customers accustomed to higher rates from the very beginning.

Cost structure aside, what is tax deductible in a home office situation and how is the deduction determined? First, let us note that the home office deduction is its own separate calculation away from the other expenses of the business. The home office deduction will include: mortgage interest or rent, real estate taxes, utilities, maintenance expenses, insurance (mortgage and homeowners), capital improvements, and depreciation. In order to be eligible for this deduction, the home office must be used exclusively for business purposes. The business purpose includes seeing customers or patients (the revenue function takes place in the home office) , or the performance of administrative functions (bookkeeping, billing, customer service) because there is no other place to perform these tasks. The home office deduction is calculated after the profit fro the business id determined. Suppose that a business has a profit of $3,000 before taking the home office deduction. If the home office deduction is calculated to be $5,000, then only $3,000 of the home office expenses will be allowed during the current year. The remaining $2,000 will be carried forward. The home office deduction will not be permitted to create or increase a loss. If the business made $10,000 in the year as opposed to $3,000, then the entire $5,000 would be deductible as home office expense. IN this situation, the home office deduction reduces income tax exposure as well as the exposure to the self-employment tax. To find out more about the home office deduction and how to calculate, go to my website at www.mwibonline.com and order my audio book on the home office deduction.

Ron Piner, CPA

Host of ?Better Business?

Saturday Mornings at 10ET

ON WBIS AM 1190

www.wbis1190.com

www.mwibonline.com