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Contributing Authors

	Tom Severance Author of Business Start-Up Guide
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	Joe Kennedy Author of The Small Business Owner's Manual
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	Steven D. Strauss Author of The Small Business Bible
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	Stephanie Chandler Author of The Business Startup Checklist & Planning Guide
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Home Business

Small business owners may be able to deduct certain expenses for part of the home, even if it is not the primary business location.

The IRS considers deductible expenses for business use of the home to include the business portion of personal expenses such as depreciation, maintenance, insurance, mortgage interest, real estate taxes, rent paid, repairs, and utilities. If a home office, for example, is 15 percent of the square footage of the home, the small business owner as an individual may submit an expense report to the company for 15 percent of these expenses and receive reimbursement. The company’s taxable net income and income tax expenses are reduced, but neither the owner nor the company incur payroll taxes on these amounts.

To deduct these expenses, IRS rules require that the home be used “regularly and exclusively” as one of the following:

The principal place of business for a small business [this means that the home is used “exclusively and regularly for administrative or management activities of your trade or business; and you have no other fixed location where you conduct substantial administrative or management activities of your trade or business” (Reference: IRS Topic 509, Business Use of Home)]
The place where you meet and deal with patients, clients, or customers in the normal course of the trade or business
A separate structure that is not attached to the home in connection with the small business

Be careful that no personal activities are apparent in the room, because this would foil the requirement that the room or structure be used “exclusively” for business. For example, if a library of family photographs resides on bookshelves or on the computer in a home business office, this may cause a problem.

Be sure to keep records, bills, checks, and worksheets used to calculate these deductions.

As a practical matter, many small business owners use portions of the home for business and take liberal deductions even when the allowance is questionable.

Use IRS Form 8829 to calculate “business use of the home” deductions. This amount is then carried as a deduction to the appropriate business income tax return statement. IRS Publication 587 has detailed information on rules for the business use of the home (available at www.irs.gov, or call 1-800-829-4933 and receive free copies by mail).