Are There Tax Savings Hiding in Your Home Business?

A Home Business Article Contributed by Abe Gardea

Are There Tax Savings Hiding in Your Home Business?

As a home based business owner, you are entitled to most of the normal deductions that other businesses are, but in addition, you may be entitled to additional tax savings. The IRS allows for a home office deduction, and if you qualify, you could reduce your tax bill substantially. A home office deduction allows you to divide the following expenses between your business and your home: rent or mortgage payment, home insurance, utility bills, phone expenses and any household help that you require.

For a small business, these deductions could make the difference between a profitable year and one that just breaks even. If you are not sure whether or not you are entitled to this deduction, check out the tips below to see how it works.

Home Business Tax Savings Tip # 1

First, you need to determine whether or not you qualify, and that will depend on how your business is set up. There are three types of tax structures that qualify, and they are: a sole proprietorship or an individually owned LLC, a partnership or multi-member LLC, which is choosing to be taxed as a partnership, or when the owner of the business is considered an employee, such as in some corporate structures. If you're not sure whether or not you fall into one of these categories, be sure to talk to an account before taking the deduction.

Home Business Tax Savings Tip # 2

The IRS insists that in order for a business to take this deduction, you must use your home office on a regular and exclusive basis. What exactly does that mean? According to the IRS it means that you must use the space on a consistent basis -- rather than every once in a while -- and that you use it only for your business. It is possible to take a partial deduction if you share the space with your personal needs, but you would need to prorate the difference.

For instance, if your home office is set up at a desk in the kitchen, then you obviously use the space for personal and business uses, and you would only be able to deduct a portion of the space.

Home Business Tax Savings Tip # 3

If you have an office space in a building outside of your home, but you work at nights in your home office, you won't be able to take the home office deduction. The final requirement of the IRS is that your home office be the main location of your business, and that you work exclusively from it.

One final point to remember is that if your business is operating at a loss, the home office deduction will not apply. In other words, if your income is at $0, and the home office deduction would move it into a loss, you won't be able to use it. The good news is that you can use this year's home business tax savings in a prior or upcoming year if you're operating at a gain.