Tax Considerations for the Home-Based Business

Many business owners are turning to their homes as the primary location for their business operations. Home-based business owners, or homepreneurs, must have excellent management skills and be able to balance the home and work environment. If you are considering opening a home-based business, take some time to become familiar with the unique tax laws and requirements.

Deductions

To claim home-based business expense deductions, your home must be your principal place of business. Unattached structures can also be claimed if they are used in connection with your business. In certain cases, you can even claim apartments, condominiums, watercraft or a mobile home. Expenses can be claimed for home-based businesses including personal vehicle usage to meet with clients, health insurance, and portions of utilities, mortgage interest, repairs and maintenance. There are separate tax laws that are applicable to home daycare centers. Consult with a tax professional to make sure you are taking advantage of all deductions you can claim for your home-based business.

Depreciation

If you own your home and operate a home-based business, you can claim depreciation expenses. To claim tax depreciation for your home-based business, you must be able to provide the date purchased, the purchase price for your home, and any home improvements you have made. Land value should be excluded when computing the depreciation expense. Should you ever decide to sell your home, you may have to pay back some of the depreciation expenses you claimed.

State Sales Tax

If you are selling a retail product from your home-based business, you must obtain a seller's permit from the state or community your business operates in. Depending upon where your business is based, you may have to pay both state and local sales tax. You will have to collect sales tax, report and pay this amount to the proper government entity. Check with your state's department of revenue to determine which products and services are taxable and to find the tax rates. Many states offer the capability to report and pay sales taxes online.

Home-based Business Tax Schemes

To claim business deductions for a home-based business, your business must be a bona fide business. The Internal Revenue Service has reported cases of homeowners claiming false business deductions. These homeowners are claiming non-deductible living and personal expenses without having a real home-based business. The IRS is taking aggressive enforcement action against these false claims.

Sources:

http://www.irs.gov/taxtopics/tc509.html

http://www.irs.gov/publications/p587/index.html

http://www.irs.gov/businesses/small/article/0,,id=133876,00.html

http://www.sba.gov/content/small-business-expenses-and-tax-deductions

http://www.entrepreneur.com/homebasedbiz/legalissues/article81180.html