How To Handle Home Based Business Expenses And Tax Deductions

Anyone that starts a home based business should be familiar with what business expenses and capital expenses are.  Business expenses are common expenses that are the cost of conducting a trade or business.  These expenses include the cost of doing business and you will usually be able to deduct them come tax time.  Some of the deductible costs are business travel, paying employees and the cost of your Internet services if you use them for your business. 

 

Capital Expenses refer to the cost of buying individual things such as equipment or property that you will use for years to come.  The equipment that you have to purchase for your business, such as a laptop or furniture for the waiting room of your lobby, are capital expenses.  While capital expenses are not deductible, you can get that money back through depreciation, amortization or depletion.  This means that you can deduct part of your cost every year to recover the money you have spent on capital expenses.

 

When you are figuring out what a business expense is, think about if it is ordinary and necessary.  That means that whatever you are buying is accepted in your field of business, thus making it ordinary, and it is helpful and appropriate for your business, making it necessary.  If whatever you are buying falls into these two categories then you can deduct it. 

 

If you are buying something that is will be used for both business and personal usage, you can deduct the business portion.  For example, if you are borrowing money and put 80% towards business and 20% towards family expenses, you can deduct 80% of the interest as a business expense.   The rest is not deductible because it is personal.

 

In order to deduct part of your home for business you have to deduct expenses for the business use of your home.  You can deduct part of your mortgage interest, insurance, utilities, repairs and depreciation.  If you live in an apartment and are a renter you can still take this deduction.  No matter what type of home you live in you will be able to these deductions for your home office.

 

In order to deduct for a home office you will need to be able to prove two things.  First, you home office should be used regularly and exclusively for your business.  The other thing that is necessary for home office deduction is that the office is the principle place of your business.  If you conduct some business outside of your home but do the majority of it from home your home office is still deductible. 

 

If you have a free standing structure that you use for your business, like a garage or shed, you can deduct expenses for that as well.  It does not have to be the principle place that you conduct business if it is where you meet with clients, customers or patients.  The percentage of your home office should be what your deductions are based upon.  You want to be sure that you have a full understanding of what the IRS considers a home office before you start deducting.