Small or Home Based Business Tax Planning

Many Americans run small businesses from their homes in a wide variety of areas, ranging from personal services to manufacturing products. Typically, the majority of small businesses get their start in the home. When running a small business from the home, home business tax planning can play an important part in helping maintain a profitable venture.

Can Home Living Expenses Qualify as a Deduction?

The first area of concern involving home business tax planning is whether or not your home can qualify for deductions. The IRS has set out specific qualification measures for deducting business expenses in the home.

You must use your home:

1) Exclusively and regularly as your principal place of business,
2) Exclusively and regularly as a place where you meet with patients, clients, or customers in the your normal course of your trade or business,
3) in the case of a separate structure which is not attached to your home, in connection with your trade or business,
4) On a regular basis for certain storage use,
5) for rental usage OR
6) as a daycare facility.

IRS’s Guidelines for Tax Deductions of Home Based Businesses

While the IRS’s guidelines are a bit more substantial, these basic rules will help you make a preliminary decision as to your ability to deduct. Under the “exclusive use” test, you must use a specific area of your home only for your trade or business. To qualify under the “regular use” test, you must use a specific area of your home for business on a regular basis. To qualify under the “trade-or-business-use” test, you must use part of your home in connection with a trade or business. To qualify to deduct the expenses for the business use of your home under the “principal place of business” test, your home must be your principal place of business for that trade or business.

Deductable Expenses

If you determine your home business qualifies for tax deductions, home business tax planning will help decide what you can deduct.

Deductions for expenses normally on your home can be included as a business deduction (based on the percentage of business usage) include:

• real estate taxes
• qualified mortgage insurance premiums
• deductible mortgage interest.

Deductions for expenses relating to your small business will include:

• depreciation
• insurance
• rent
• repairs
• security systems
• utilities and services.

Tax Issues and Help from a Taxation Attorney

The area of home business tax planning can be tricky. Waiting until your tax returns are due may be too late to discover your deductions, or discover that you don’t qualify for deductions you thought you could count on. By speaking to experienced tax lawyer, you can discuss you situation at the start of your business and begin home business tax planning at the earliest stage. Also, your lawyer can advise on your deductions should the IRS bring an audit against you.