One of the most notable changes that technology has brought to the workforce is the proliferation of home-based businesses. Whether you operate as a sole proprietorship or an LLC, the use of the home for business provides certain potential tax advantages. One needs to be careful, however. To avoid issues with the IRS, you should consult with a Boston tax planning attorney before claiming deductions that may not be accepted.
Calculating the Home Work Area
Few things can cause more stress for a business owner than an IRS audit—or worse, penalties. As a Boston tax planning attorney can tell you, the Internal Revenue Service has begun to take a much closer look at how home-based business tax deductions are taken.
The first consideration one needs to make is how much of the home area is used for the business. It is advisable that this area be kept solely for conducting of the business, if possible. One needs to calculate the percentage of living space, and if need be, the percentage of the time it is used for business purposes.
Determining Which Expenses Can Be Deducted
A home business owner needs to be able to distinguish not only which items are deductible, but also which can be claimed as use of the home deduction. Certain types of expenses—advertising, materials, supplies, salaries, etc.—may be deductible but need to be calculated in their proper place on tax forms. Such categorizing can be quite complicated, especially for large businesses, for which a Boston tax planning attorney is ideally suited.
Direct and Indirect Expenses
Home use expenses are categorized as either direct or indirect:
- Direct Expenses: These pertain to the actual physical work area, and include flooring, carpeting, drapes, paint, wallpaper, etc. Furniture used for the business would be calculated elsewhere.
- Indirect Expenses: These relate to the operation and maintenance of the home. Among the many types of deductions that are indirect are:
- Rent/mortgage payments
- Real estate and property taxes
- Mortgage insurance costs
- Utilities such as water, electric, and gas
- Repairs to the home
If you are operating a business out of your home, it is vital that you have a clear understanding of the types of business tax deductions to which you are entitled. A Boston tax planning attorney at Ionson Law will be glad to speak with you. Call to schedule a consultation at (781) 674-2562.