During our session today I am going to discuss two tax benefits of having your own small business. The first is for those who have a home based business. If you qualify, the 'office-in-the-home' tax benefit allows you to deduct a portion of you home mortgage interest (or rent if you do not own your home), real estate taxes, utilities and other expenses related to your home.

What we are discussing today relates to the IRS rules and regulations regarding these two topics. However, we are not here to give you tax advice. Please contact your tax advisor to see how, and if, the two tax benefits affect your small business.

Explanation of Business Use of Your Home

But, first the boring part. Let's read what the IRS states on their site about 'business use of your home'.

Business Use of Your Home

To deduct expenses related to the part of your home used for business, you must meet specific requirements. Even then, your deduction may be limited.

To qualify to claim expenses for business use of your home, you must meet the following tests.

• Your use of the business part of your home must be:




• Exclusive (however, see Exceptions to exclusive use, later),


• Regular,


• For your business, and




• The business part of your home must be one of the following:





• Your principal place of business (defined later),


• A place where you meet or deal with patients, clients, or customers in the normal course of your business, or


• A separate structure (not attached to your home) you use in connection with your business.

Now let's talk about whether you home office is your "principal place of business".

Principal place of business - you can have more than one business location. Does this surprise you? To deduct HO expenses your HO must be your "principal place of business"

Your home office will qualify as "principal place of business" if:

* You use it exclusively and regularly for administrative or management activities of your business

* You have no other fixed location where you conduct substantial administrative or management activities of your business.

If your home office does not qualify as your "principal place of business", but you use it exclusively and regularly, you may still qualify for the deduction based on the following factors:

* The relative importance of the activities performed at each location, and

* If relative importance factor does not determine principal of business, you can also consider time spent at each location.

Confused? Maybe some examples will help.

Example 1: Bill, the plumber, has his own small business and spends the majority of his time in his client's homes. He does have a home office that he uses exclusively and regularly for his administrative and management activities. Even though the majority of his time is spent outside of the home office, it qualifies because there is no other office where he can conduct substantial administrative activities.

Now for the bad news/good news!

The bad news - there is a deduction limitation determined by net income. The IRS Form 8229 used to calculate the HO allowable deduction is attached to your business tax return (for Schedule C tax payers). This form helps you work through the allowable deductible amount.

Basically you can deduct the allowable portion of the items you can also take on your Itemized Deductions (or Schedule A) - this means Home Mortgage Interest, Real Estate Taxes and casualty and theft losses.

The remaining deductions (% of utilities, insurance, repairs and etc) are limited to net income.

The good news - the disallowed deductions can be carried forward to a future year in which your business has net income.

How using the home office tax benefit will put more money in your pocket

First, most small business owners are not aware that there are three methods to calculate your HO percentage. You want to be sure to use the one that gives you the best write off. Let's take a brief look at all three methods.