First Person: What I Learned By Filing a Tax Return for My Home Business

Though I have owned small businesses in the past, none where in my home. This year, I prepared my taxes for a home business under the close guidance of my accountant. It's important for home business owners to understand the deductions available to them, but it is also important to mention that declaring a portion of the home as a business increases the chances of an IRS audit. Here are the tax preparation tips I followed for my home business.

Expense Receipt Deductions

You're permitted to deduct any expense that was instrumental to the operation of your business. This can include business lunches, research material, entertaining or any other expense that directly relates to the business. However, I took care not to declare items that could also be strongly attributed to personal use. For example, though I wrote extensive home improvement articles as a freelance writer, I did not expense these costs as the improvements were made to my home and for my personal benefit. When I would sell the home one day, I could conceivably benefit from this investment.

Car Deduction

The portion of your car travel that was used for business expenses can be deducted. I kept a car log that noted the odometer reading at the start of the year. I then noted each business trip I made, indicating the reason, the miles traveled, the odometer start and finish. At the end of the year, I subtracted the start odometer reading from the final reading. This represented my total car usage for the year, both personal and business. Then I added up my business travel miles and calculated what percentage this was in relation to my total travel. A fixed dollar amount of deduction was then applied for each mile, a figure that meant to cover my vehicle wear and tear and fuel expenses incurred through business travel.

Home Office Deduction

If you decide to declare your home as a business, you can expense a portion of your home expenses equal to the area in the home used for business. In my case, comparing the size of my home office to my house, I arrived at a fifteen percent ratio. I could then choose to expense fifteen percent of my mortgage and utilities as business expenses. However, I decided against this for two reasons. First tax law would require me to use the office for business purposes only and remove all non-business related items from the room. Secondly, my chances of IRS audit would increase.

Office Expense Deductions

Whether you expense your home office or not, any supplies you buy to run your office are deductible. These can range from a new printer to staples. If, at the same time, you wish to purchase items that are unrelated to your business, pay for them separately so as to receive separate receipts. Otherwise, this complicates the expense accounting when you need to subtract items (with tax) from the receipt total.

Internet & Phone Deductions

A portion of your cell phone and internet can be deducted as business expenses whether or not you declare your home as a business. You will need to estimate what portion of usage (if any) was made for personal use and which for business. Typically, considering your number of business hours out of your waking hours will give you a fair estimate. As an online freelance writer who works long hours, I estimated my internet usage as 80% business.

Finally, remember to keep your documents in an organized folder, with all receipts and attachments included with your tax return. Be prepared that, as a home business owner, you may be audited and will need to have your accounts in order.

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