Small In-Home Business Tax Deductions
- As with any business, you can claim all business-related expenses for your in-home business on your income tax returns. These expenses include supplies, such as paper, copier ribbons, pens, notebooks, date planners and phone message books. These are items that are used up and must be periodically replaced. Another deduction is office equipment, namely computer systems, telephones, paper shredders and copy machines. You can opt to depreciate expensive pieces of property that have a useful life of many years, such as a computer system. By depreciating an item, you take an annual deduction that is part of the total cost. For example, a $5,000 piece of audio/video equipment can be depreciated over five years by deducting $1,000 a year. Internal Revenue Service Publication 946 and instructions for Form 4562 explain depreciation in detail.
- Generally, the IRS uses the space dimensions of your in-home office in comparison to the total floor area of your home to determine the amount of deductions that can be claimed for certain home expenses. For example, suppose your home's floor plan is 1,500 square feet, and the room you use as an office is 150 square feet, which is 10 percent of the home's total area. You could deduct 10 percent of the cost of your homeowner's insurance premium and 10 percent of your property tax. If your property taxes are $3,000 a year, you can claim $300 as a deduction on your income tax return.
- If your home office, which can be a garage or other building on your property, has its own separate electric meter or heating supply, such as a separate propane tank, then knowing the amount of deductions that can be taken for these utilities is easy to determine. In the case where you have central heat, such as oil or natural gas, use the percentage figure based on the office's area to calculate the part of the expense that can be deducted. A $3,000 annual oil bill for heat, for example, would result in a $300 deduction for your in-home business. Regarding telephone service, deduct the part of your bill for any long distance calls you make; or if you have additional phone lines for your business and perhaps a fax machine, the extra fees incurred from these additional lines can be deducted. If you have an Internet service that is used for both your family and for your business, estimate the percentage of usage for your business and deduct that portion as a business expense.
- In order to take tax deductions for operating an in-home business, the IRS requires that "the relative importance of the activities performed" and "the amount of time spent at each place where you conduct business" are the two basic criteria that define a business use of your home. The area must be used "exclusively" and "regularly" to conduct business, such as meeting clients, making appointments or doing billing, to qualify as an in-home business.
