The IRS, Taxes, And the Small or Home Based Business

The IRS, Taxes, And the Small or Home Based Business Related Information:

These days, many people have businesses of their own. Having a saleable idea or product, providing a service that has a demand, and the desire to make money, have all led many a person to start off their own small business. The easiest and best way to start a small business is to begin from home (provided you follow the zoning requirements).

A home-based business can be a great way to earn a living. You can work from the comforts of your home and do away with the need to commute to work. Along with these conveniences, there is another major advantage to a home-based business – that of taxes.

Home Office and Taxes

If you run a business from your home, or work out of your home for your employer, then your business may be subject to the following types of taxes:

Employment Tax: If you have a home-based business and employ one or more employees, then you may need to pay employment taxes and payroll taxes.
Self-Employment Tax: Levied on people who are self employed. These taxes are contributions towards Social Security and Medicare.
Unemployment Insurance Tax: If you employ one or more employees for a minimum of 20 weeks in one year, or pay wages in excess of $1500 in any quarter, then you may be required to pay federal and state unemployment taxes.
Income Tax: Federal and state income taxes that are levied on any income from your home-based business.

A small or home-based business is not separate from its owner as far as taxes are concerned. A home-based business does not pay taxes as a business, but the owner pays taxes on their profits from the business. The IRS allows some deductions that can be taken by someone working from home, which can go a long way towards lowering their tax bill. But home-based business deductions can only be taken under the following circumstances:

Exclusive and Regular Use of Home for Business: Home office deductions are allowed only if you use any part of your home for conducting business activities regularly and exclusively. If you use a part of your home for work, then that portion should be used only for work and nothing else. For instance, if you use your study as a home office from 10 a.m. to 6 p.m. after which you use it as a recreational den, then it is not used exclusively for business, and does not qualify for home office deductions.

The home should be used as a place to conduct business regularly. Working from home occasionally, or using your home intermittently for business, does not qualify it for home office deductions.

Your home, or any part of it, should be your primary business location. You can have other business premises, but your home should be the main place where you meet clients, sell your product from, or provide any service from. If it is not the principle location for your small business, it cannot qualify for home-based business deductions.

Exceptions to the above rule of exclusivity are:

Caregivers to children or the elderly who use their homes as daycare centers.
Merchants who use their homes to stock inventory.

In the above two cases, a home need not be used for the exclusive purposes as mentioned above, but can still qualify as a home-based business.

Expenses Allowed To Home-Based Small Business

Utility costs
Car and car expenses
Property taxes
Mortgage payments
Rent payments (for renters)
Repair and maintenance expenses
Home owner’s insurance premiums
Depreciation on home

All the above expenses can be deducted in proportion to the area of your home that you use exclusively for business. For instance, if your home has four rooms and you use one room for your home business, then you can deduct 25% of your home expenses as business costs. Similarly, if your home is 1000 sq. ft. in area and you use 100 sq. ft. area for your home office, then you can deduct 10% of your home expenses as business costs.

Determining whether or not your home-based business qualifies as one, and taking all the deductions allowed by the IRS, can help you to greatly reduce your taxes.