Great Reasons to have a Home Based Business

We've always encouraged our clients to have a home based business. It is a wonderful way to provide extra income as well as to receive certain tax breaks and incentives. It is a great way to find something you enjoy and turn it into a money making venture. Many of our clients have subsequently made their part time business their full time company!

For those of you that might still be on the fence about this, the following article might help you make up your mind.

By the Census Bureau's last count in 2002, half of all businesses in the U.S. are home-based. The U.S. government encourages this kind of entrepreneurship. Dig deep and at-home entrepreneurs will find a few precious tax deductions, say Mark Birge and Steve Mentzer, accountants with Aldrich, Kilbride and Tatone, an Oregon-based accountancy firm.

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Below are five deductions homebodies would be foolish to ignore. (The last two also apply to any small-business owners.) To increase your odds of success, be sure to keep your business and personal life separate--including all checking accounts, credit cards and phone bills. "Don't commingle," says Mentzer. "You'll always lose out to the IRS."

With that advice, lets see the deductions!

1. Infrastructure (utilities, phone service, housekeeping services, landscaping)

Run-of-the-mill homeowners and renters can't deduct these expenses, but at-home entrepreneurs can. To calculate the percentage of these "indirect expenses" that is tax-deductible, determine how much of your house is used as office space. If your office takes up 200 square feet of your 2000-square-foot home, you can theoretically deduct 10% of these expenses. The IRS doesn't require the area be confined by walls--only that you spell out why you call it an office.

This is awesome! Now that room that you have been using to store your computer and surf the web can be converted into your office and used as a tax break!

2. Home mortgage interest and property taxes

U.S. taxpayers can deduct these anyway, but as a small business owner, you can save even more by applying a percentage of mortgage interest and property taxes to the home-office section of your tax form, says Birge. Reason: Deductions for mortgage interest and property taxes are capped, but there are no limits on the home-office portion.

Read that last part again. There are NO LIMITS on the home-office portion!

3. Travel expenses

You can't deduct fuel expenses if you commute to work each day, but if you work from home, you can deduct the costs of traveling away from your home for any business-related activity. For each mile traveled in a car, deduct 44.5 cents. Alternatively, you can take the percentage of miles traveled for work and deduct that proportional amount from what you spent on gas, oil changes and repairs. Mentzer suggests keeping a mileage log and writing down the purpose of every trip and the date in case the auditors come calling.

With the cost of fuel these days, this is very important. We have some employees that are averaging over $600 a month on gas alone. Now, if they were able to deduct part of that because they had a home-based business it would be a huge lifesaver! The log mentioned above is very important. In fact, we recommend logging all home-based business expenses. This will help you avoid any problems with the IRS and allow you to prove to them all the deductions you take. Again, KEEP A LOG!

4. One-time office equipment purchases

Section 179 of the tax code says you can take a one-time deduction--up to $105,000--for the purchase of office equipment, as long as you don't purchase more than $400,000 of equipment in a calendar year. That's nice, but many startups don't generate enough pretax income to get the full benefit of the deduction. Married entrepreneurs have an edge: If one spouse spends $10,000 on equipment, but only brings in $5,000 in pretax income, he can still apply that entire $10,000 to the couple's joint tax return. "There are not too many situations where it is beneficial to file separately from your spouse," says Mentzer.

Read that and follow it carefully. We encourage our people to take every tax advantage possible when running a home based business. Sometimes, getting these advantages aren't easy and there are some hoops that you will have to jump through. Make sure that you do it!

5. Family affair

Sole proprietors with children under 18 who work for them can deduct their children's "wages." Just make sure you actually get some work out of the whippersnappers.

It is a great opportunity to teach your children the value of hard work in a safe environment. The world can be dangerous and having your children work in certain places might not be the best thing to do. Having a home based business allows you to control all aspects of the work they do and the people they work with. A win-win situation!

These are only a few of the reasons to have a home based business. We'll continue to write more about this in the future so come back often!