How to Deduct a Home Office

Distance Education Helps You Get Ahead

CanadianMedsWorld.com

NEW YORK -- One of the most tempting but also terrifying small business tax deductions is for a home office _ deducting the cost of operating out of your home can help you save on taxes, but complying with IRS regulations can be a little daunting.

Accountants say the good news is that the deduction, which used to be considered a fast way to an audit by the IRS, doesn't raise red flags with the government as it did in the past. Still, business owners often make mistakes trying to claim the deduction that can grab the attention of the tax authorities _ something every taxpayer wants to avoid.

Stephen Fishman, an attorney and author of "Home Business Tax Deductions" said a common error company owners make is to try to deduct space in their homes that has both business and personal uses. That won't fly with the IRS.

"You have to use the space in your home exclusively for business," Fishman said.

An office with PCs and a fax machine isn't the only way to take advantage of the deduction for using your home for business. If you manufacture goods or store inventory in your home, the space you use for that can also be deducted. The same applies if you run a business like a day care center or nail salon in your home.

You don't necessarily have to have a separate room for your office or business space, but taking the deduction is less complicated if a room is indeed set aside for business purposes. For example, it might be hard to convince the IRS that the home office in part of your family room is never used by your children to do their school work or play computer games.

Whatever the space is, it must be regularly used for your business. It doesn't have to be your only place of business, however.

An owner with a home business can deduct the expenses used to maintain the business space _ the portion of utilities, mortgage interest or rent, insurance, repairs and maintenance and other expenditures that can be attributed to that space. One of the big pluses of a home business deduction is that you can also depreciate the portion of a residence used for business; normally, a residence cannot be depreciated.

To determine how much of their expenses they can deduct, most owners divide the total square footage of the home by the square footage allotted to the business. For example, if 5 percent of a house was used for a business, and the owner had $5,000 in expenses for the entire house, then $250 could be deducted.

But square footage is another way owners can run into trouble with the government _ for example, if it appears to the IRS employees examining your return that your home business space is too big for the kind of business you operate, they may question the size of your deduction.

If you're thinking of claiming the deduction, you need to get yourself educated about the IRS' requirements. The first thing you should probably do is download and carefully read IRS Publication 857, Business Use of Your Home, from the IRS Web site, http://www.irs.gov. There are also several small business and home business tax guides available in bookstores that can give you a grounding about the deduction.

Also take a look at the IRS form you'll need to file, 8829, Expenses for Business Use of Your Home, and its accompanying instructions. They can also be downloaded from the IRS Web site.

It's probably a good idea not to try to claim the deduction without consulting a tax professional. Jeffrey Chazen, a tax partner at the accounting and consulting firm Richard A. Eisner & Co. LLP in New York, noted, "there are little quirks you have to look out for" with a home business deduction.

For example, he noted, if you've been depreciating the space for your home office but now sell your home, you'll have to "recapture" the depreciation, or adjust the profit you made on your house to account for the tax break you already received.

Another, important quirk: Your deduction cannot be larger than the net profit you make. But you can use the excess to offset profits in succeeding years.

Chazen suggests that now, as you're preparing your 2006 tax return, isn't the time to be thinking about the home business deduction for last year. If your business space didn't already meet the requirements for the deduction, you can't shoehorn it in after the fact.

You can, however, start working now so you can claim the deduction for the 2007 tax year.

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10 Marketing Tools for Home-Based Businesses

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Owners of home-based businesses sometimes view marketing as an unnecessary expense, but nothing could be further from the truth. Because a home-based business doesn't have a storefront for passers-by to notice and no opportunity to generate walk-in business, home-based businesses need marketing more than other types of businesses, not less.

Not marketing your home-based business will almost certainly doom it to failure. Here are ten ways you can advertise your home business on a budget.

1. Direct mail. With the rise of email marketing, direct mail has fallen out of favor. But it is still a cost-effective way to advertise in many industries. To be successful, your direct-mail piece should look professional and feature well-written copy. Hire a professional copywriter and designer if these skills are beyond you ability. You may even be able to barter for design or writing work.

2. Voicemail. Even the outgoing message on your answering machine or voicemail system can help promote your business when utilized correctly. Make sure your message provides additional product or service information so that it is working for you, even in the middle of the night.

3. Brochures. Brochures are still an effective way to present your product or service to new customers. They are relatively cheap and easy to print and you can distribute them by mail or by leaving them at locations where they will be noticed. A professional-looking brochure can help convince potential customers that are still “on the fence” about your products.

4. Press releases. The only thing better than cheap publicity is free publicity, and well-timed, professional press releases can result in just that. By timing a product launch or promotion to coincide with a related local or national event, you may be able to get editors to include your release in their media vehicle, be it newspaper, radio, or television. (Read "How to Write an Effective Press Release.")

5. Case studies. Case studies aren't just for scientific applications. Studies of your products in action can help your potential customers learn more and make an educated decision before they buy.

6. Referrals. Referrals are probably the single best way to find new customers. If you do something well, chances are people are going to talk about it. Offering incredible customer service to your clients will ensure that you end up with satisfied customers who are willing to share your information with their friends and colleagues.

7. Radio interviews. If you can speak knowledgably about your product or service and tie it in well with current events, radio interviews are a great way to reach a wide audience and improve your customer base.

8. Affiliate programs. Online affiliate programs are one of the most cost-effective ways to market your products to a wide range of potential customers. It's like having the benefit of a commission-based sales force, but without any of the hassles of managing actual employees.

9. A well-designed Web site. Your Web site will be the first impression for your company for many of your customers. Make it a good one. Your site should provide information about your product or service in a clear and intuitive format. Many people prefer to do their research online before making a purchase, so make sure your site leaves them with the right impression. (See "Building a Web Site for Your Home-Based Business" and also "Web Site Quick-Start Guide."

10. Ezines or Newsletters. When you provide interesting and informative content related to the products you sell, you can turn a subscriber list into a frequent buyer list. If you do not have the time to run your own ezine or newsletter, you can submit articles with your information to different publications. When you are perceived as a knowledgeable expert, potential customers know that they can rely on you for quality information and quality products.

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