For a lot of entrepreneurs, working from the comfort of your home is a dream-come-true, but that is until they experience it first hand. However, the truth of working from home is a reality is much more beyond skipping the day shave or fuzzy bunny shoes. A disciplined person can save a valuable amount of time with a home office, although for others, it can be wastage of time. Without discipline, you will feel inefficient according to a certified financial planner and accountant Howard Hook.
Consider the taxes. To create a home office space at home, you need to get it right. There are strict rules of the IRS regarding home offices as they offer valuable deductions to the businessmen. The home office should be used regularly and exclusively for the purpose of business. This means that the room needs to be used only for business purposes. It cannot be doubled up as a guest bedroom. While an auditor will not know whether you let your kid watch TV in your home office, you can violate the rules if this happens regularly.
The deduction needs not happen for a whole room if that part of the room is not used for personal reasons. This portends an exception for retail and wholesale dealers who use a part of the home for storage of product and inventory samples if a few criteria are met. You need to check with your tax preparer if you are not sure whether you qualify for a certain deduction.
- Direct and Indirect Expenses: Direct expenses are attributed only to the business part of the home like separate telephone lines and business equipment. The indirect expenses are required for the entire property, including personal and business expenditure like rent, insurance and utilities. These are differently treated as deductions.
- Recordkeeping: The burden of proof is on the taxpayer says Hook. Good recordkeeping can indicate to an IRS agent the legitimacy of the business. this is helpful for businesses which are expecting losses since losses point towards a red flag.
- Depreciation on the House: Usually, when the house is sold, you might be eligible for exclusion on the total gain, although on using the part of your house for the business, a part of the gain might become taxable.
If there are adequate records showing that you have deducted less depreciation than what you were allowed, the part of the gain that would be taxable would be up to the depreciation amount that was actually deducted.
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