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Tax Deductions For A Home Business in Today's Economy
By The BIDaWIZ Team - September 15, 2009
In recent years there has been an increased number of freelancers managing their business from home. While this trend has taken place, there has been a lack of credible tax advice available to these business owners. Below, we try to fill this void.
Will Your Bottom-line Be Negative This Year?
If this is the case, you should be aware of the deduction limitation when business expenses are greater than gross income. Unfortunately, you cannot take the full loss as a deduction, but you can carry forward the loss. For complete details refer to the IRS publication 587; deduction limit.
What if Things Are So Bad, You have to Sell Your Home/Business?
Well, as you probably know, $250K ($500K if married) of your capital gain is excluded for tax purposes if you owned the home for at least 2 yrs and used it as your main home for 2 yrs (dating back 5 yrs from the date of sale). If part of the home was used for business purposes the capital gain does not need to be allocated to the business. If the business was located separately from your home, but on the property, the correct treatment of the gain depends on the specific situation which requires tax consultation.
Understanding the "Business Portion" on Your Home Expenses
Believe it or not you can decipher between business & personal expenses even if you work out of your home. For an item such as a credit card machine, it is an obvious direct business expense. Rent on the other hand would be treated as both a business & personal expense since it satisfies those two purposes. The way to calculate the business portion of the rent expense is to divide the amount of square feet used for business purposes by the total square footage of your home. For instance, if your business office was 500 sq feet and your entire home was 2000 sq feet, you would be able to treat 500/2000 or 25% of your of rent expense as a business expense. Please note that the business must be up and running to treat this expense as business expense. So if you launched your business in July, you could only claim the business expense from July onward.
The Business Portion of These Expenses Are Deductible
Real Estate Taxes
Qualified Mortgage Insurance Premiums
Deductible Mortgage Interest
Rent
Casualty Loss
Utilities
Insurance
Depreciation
Security System
Repairs
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