Home Office Tax Help

Question: I launched my business last year at home. I'm growing and hope to move out at some point, but I'm stuck here for now. Can I deduct a portion of my mortgage payments, taxes, utilities and other costs as a business expense? I've heard that the IRS has gotten much tougher on home office deductions.

Answer: Yes, there are many home-based business tax deductions that you can probably claim. Making a go of a home business is hard enough without overpaying Uncle Sam. Home office costs, as well as startup and operating expenses, car and travel expenses, inventory, equipment, insurance (health, homeowners, etc.) and much more are deductions available to even the smallest home business.

But while the IRS does indeed have strict rules on who and what qualifies, millions of home business owners miss out on valuable deductions each year because they are not aware of them or because they neglect to keep the records necessary to back up the deductions.

We called top IRS experts on small biz deductions and got this explanation: To deduct expenses related to the business use of part of your home, you must meet these specific requirements:

1. Your space at home must be used exclusively and regularly for your business or trade.
   
   
2. Plus, the business portion of your home must be your principal place of business, a place where you meet or deal with patients, clients or customers in the normal course of business, or a separate structure (not attached to your home) that you use for your business.

The "exclusive use" test is what trips up many home businesses. If the space you use also doubles as a rec room or den, for example, you can't claim the deduction on your tax return. However, this test does not apply if you use part of your home to store inventory or product samples, or for daycare services.

Fortunately, the IRS does not require that you have an entire room dedicated exclusively to your business, only a "separately identifiable" space. This could be part of a room partitioned off for business use.

Like most small business tax issues, home office deductions can be tricky. Talk to a qualified tax advisor, make sure you understand the rules and keep good records. These specialized resources can also help:

• Home Business Tax Deductions by tax attorney Stephen Fishman (Nolo Press) offers a detailed, up-to-date guide to all of the potential deductions for a home based business. The book is regularly $35 but you can get it for $23.79 at Amazon.com.
  
  
• IRS Publication 587 - Business Use of Your Home explains all of the rules. It's helpful but not always easy to understand. Go to www.irs.gov/smallbiz.
  
  
• The National Association for the Self-Employed (www.nase.org) champions the self-employed and owners of micro-businesses (under 10 employees), who are mostly home-based. Membership gets you access to business tools and tax tips, plus discounts on services such as legal advice, payroll, health insurance and others. Basic dues are $96/year. See the Web site or call (800) 232-6273.
  
  
• The "Home-Based Business" section of Entrepreneur.com (www.entrepreneur.com) is an excellent place to find home biz solutions, from marketing, sales and taxes to hiring employees and getting your home business legally established. Click the "Home Biz" tab at the top of the Home page.
  
  
• Minding Her Own Business (Sourcebooks, $14.95) is a tax and financial guide for self-employed women, now in its fourth edition. Several sections deal specifically with home office deductions. Available at www.amazon.com.
  
  
• Home Business Magazine (www.homebusinessmag.com) carries loads of helpful advice and info on operating a successful home-based biz. Visit the online version at the Web site or subscribe for $15/year (six issues). The Web site in particular offers many good resources for building a home-based business. Visit the Web site or phone (714) 968-0331.
  
  
• Paul & Sarah Edwards (www.workingfromhome.com) have been home office heavyweights since publishing their first book, Working From Home (1985) - one of 13 books they've written. Others include: Best Home Business for the 21st Century, Getting Business to Come To You, and Home-Based Business for Dummies. Check out their Web site for good tips on operating from home.