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Filing Taxes For A Home Based Business

This is a question too difficult for a mathematician. It should be asked of a philosopher.

Albert Einstein, about filling out his income tax form in 1944.

Home Based Business TaxThe one thing we cannot avoid is paying taxes and every home-based business has to do so to avoid penalties.

Completing your home-based business tax forms will require good record keeping and being organized in order to take advantage of all the tax deductions you qualify for.

Plan your tax by finding out what your federal and state tax obligations are, how often you have to submit your tax forms (e.g. quarterly or annually) and the tax schedules.

How you file your taxes depends on how your business is structured, for example, if you are a sole proprietor or a single member limited liability company, you may need to complete a 1040 Schedule C form, a Schedule SE form for self-employment tax, form 8829 for home office deductions and form 4562 for depreciation deductions.

For a home based business office to be eligible for a home office tax deduction, it has to meet certain strict criteria:

  • Your home office must be the principal place of business,
  • You have to use it exclusively for your business only and
  • You have to use it regularly for business purposes.

The benefit of qualifying for a home office tax deduction is that you can claim a “business use percentage” deduction on your expenses and claim for depreciation.

There are 2 ways to calculate the “business use percentage”:

  • (Area in sq. ft. you use exclusively for business purposes) ÷ (Total area of your home in sq. ft.).
  • (Number of rooms used for business purposes) ÷ (Total number of rooms in your house).

Calculate both as you will be able to use the one with the larger percentage.

The IRS has set out the rules for a business use of home.

You can only deduct the home office usage if you have a net income (cannot create a net loss with these deductions).

Here is a list of tax deductions you may qualify for:

  • Rent
  • Mortgage interest
  • Insurance
  • Property taxes
  • Repair and maintenance expenses
  • Utility bills such as water, electricity, gas, trash.
  • Internet
  • Depreciation of home

In addition, you will need to gather all the information on your business income and your investments.

Similar to your accounting needs, you need to decide if you are prepared to do your own tax filing, whether you want to use home business tax software or use a professional such as an enrolled agent.

Most tax software has good error checking programs to spot those common problems or mismatches.

Turbotax has a Turbo Tax Home and Business download which guides you step by step through your tax filing process.

Disclaimer:

The information in this article is general and is not intended to be tax or legal advice. Each business situation is different and tax laws change frequently, therefore there should not be an assumption that these expenses will be deductible on your business tax return. Consult with a tax adviser before submitting your business taxes.

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