One of the best reasons for starting a home-based business is to keep expenses low. Renting a big office may seem impressive, but in the beginning, cash flow is critical. The less you have to pay out, the better. Besides, a stay-at-home business allows you to be more flexible in your work, eliminate commuting, and most importantly, pay less tax.
It's important to ensure your home office meets the qualification requirements of the IRS. Generally, they look for an area in the home that is completely separate from the common parts of the house that the family as a whole shares. Small-business consultants believe that a real office with a door keeping the rest of the world out allows you to focus on the task at hand, which is building a better business.
The IRS allows home-based business owners to deduct certain expenses incurred in the house that relate to the operation of the business. In order to claim 100 percent deductibility, the expense must be for the business only. This includes such items as paper, couriers, photocopying, and anything else used directly in the business.
Other items that are indirectly part of the operation of the house as a whole are partially deductible based on the amount of space the business occupies in the house. For instance, if your house is 2,400 square feet and your basement office occupies 480 square feet, you are eligible to deduct 20 percent of expenses such as your mortgage interest, taxes, utilities, insurance, etc. You can even deduct 20 percent of the cost of a security system.
Because the IRS gives home-based business owners options for deducting expenses against their business income, all sorts of business opportunities have sprouted to benefit from this situation. For example, the online travel business has grown exponentially because of Americans' desire to increase their household income while still allowing one spouse to stay home with the children. In addition, this type of business creates cheaper vacations for the family because a portion of the cost is a deductible business expense for training and education purposes.
No matter what kind of home-based business you have launched, it's important that you not only know what tax breaks you are eligible for but also which ones you are not eligible for. If you have any doubts about what counts as a deduction, consult a tax specialist or your accountant.