5 Home Business Tax Myths - and the Truth

Information about Home Business Taxes and Deductions

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Many home business owners are confused about taxes and deductions. Instead of being confused, consider these points and learn how to minimize your taxes legitimately.

Myth #1 - I can use a percentage of all home expenses as business deductions.

The Truth: You can only take those home expenses that are legitimately related to your home business or which benefit your home business. For example:

  • You can deduct a percentage of the interest on your home mortgage (not the principal) but only if that mortgage is for the benefit of your business. You cannot deduct a second mortgage used to buy a car or pay off personal credit cards.
  • Your phone charges for your home phone line are non-deductible personal expenses. But you can deduct the cost of long-distance charges for business (keep records!) and the cost of a second business phone line.

Myth #2 - I can deduct a section of my home as a business, as long as I use it most of the time for business purposes.

The Truth: You can only deduct a home office or business work area in your home if it meets two criteria. It must be used BOTH (a) regularly, and (b) exclusively for business purposes. If you use your dining room for your office, and you have holiday dinner on the dining room table, it is not being used exclusively for business purposes. For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.

Myth #3 - I can deduct home improvements as part of my home business expenses.

The Truth: Unless you can prove specifically that the improvement was of direct benefit to your home business, you can't deduct it.

If the improvement was to the area used for business, like expansion, painting, or carpeting, you can probably deduct it. If you put a new patio on the other side of the house, it is not related to your business and won't be deductible.

Myth #4 - I can take all allowable home business deductions, even if they cause my business to run a loss for the year.

The Truth: There is a limit to the amount of home business deductions you can take in any one year.

Your deductions cannot exceed your gross business income for the year. So, if you have a business loss, you can only take the home business deduction up to the amount of that loss.

Myth #5 - If I have a business location outside my home, I can't take a home office business deduction.

The Truth: You can have more than one business location and still deduct the expenses for the business use of your home is your home is your principal place of business. When determining whether your home is your principal place of business, consider:

  • The relative importance of the activities performed at each place where you conduct business, and
  • The amount of time spent at each place where you conduct business.

 See IRS Publication 587 - Business Use of Your Home for more information about this qualification.

The IRS encourages taxpayers to:

1. familiarize themselves with the requirements for taking a home office deduction, and

2. to keep complete and accurate records to substantiate deductions.

Disclaimer: The purpose of this site is to provide general information to readers. The author of this article is not a CPA or attorney, and nothing in this article or on this site is intended to be tax or legal advice. Laws and regulations change, and every business situation is unique. Readers should not take action on any tax or legal matter without reviewing options with a tax advisor or attorney.