This document discusses the tax benefits of operating a home-based business. Key points include being able to deduct home and vehicle expenses, as well as travel costs, as long as they are ordinary and necessary to running the business. Proper recordkeeping of mileage, expenses and time spent on business activities is important. Deductions are allowed for a home office, advertising, gifts, and paying family members as employees. With good documentation, a home-based business can enjoy substantial tax savings.

1. By Patti Reece
Enrolled Agent

2. Benefits of Home Based Business
 You are able to deduct expenses that you incur anyway
such as home expenses.
 Everyone we talk to are potential clients. Expenses
related to securing that client are deductible.
 Since our businesses are not limited to one area, travel
is deductible as long as the main purpose is business.
 You save not only income tax, but self-employment tax
on every deduction you are able to take.

3. Expenses
 Expenses must be "ordinary and necessary" in relation
to a legitimate business activity, and satisfy all other
requirements in order to be deductible business
expenses on a tax return.

4. Personal versus Business Expenses
 Generally, you cannot deduct personal, living, or
family expenses. However, if you have an expense for
something that is used partly for business and partly
for personal purposes, divide the total cost between
the business and personal parts. You can deduct the
business part.

5. Business Use of Your Car
 If you use your car in your business, you can deduct car
expenses. If you use your car for both business and
personal purposes, you must divide your expenses
based on actual mileage.
 You generally can use one of the two following
methods to figure your deductible expenses.
 Standard mileage rate.
 Actual car expenses.

6. Standard Mileage Rate
 Choosing the standard mileage rate. If you want
to use the standard mileage rate for a car you own, you
must choose to use it in the first year the car is
available for use in your business. Then in later years,
you can choose to use either the standard mileage rate
or actual expenses.
 The standard mileage rate includes all expenses except
finance charges. This is reported separately at the
business percentage of use.

7. Actual Car Expenses
 If you do not use the standard mileage rate, you may
be able to deduct your actual car expenses.
 If you qualify to use both methods, you may want to
figure your deduction both ways to see which gives you
a larger deduction.
 Actual car expenses include:
 Depreciation
Licenses, Lease
payments,Registration
fees, Gas, Insurance, Repairs, Oil, Garage Rent, Tires
Tolls, Parking fees

8. Keep a mileage log
 The IRS requires that you keep a mileage log. This log
shows the miles driven and the business purpose
 At tax time, you will need:
 1. The total miles driven
 2. The number of business miles
 3. The number of commuting miles (if you use the car
for a “job”.
 4. The balance would be personal miles.

9. Advertising display on car.
 If you use your car for both business and personal
purposes, you must divide your expenses between
business and personal use. You can divide your
expense based on the miles driven for each purpose.

10. Home Office Deduction: Basic
Requirements
 In order to claim a deduction for that part of a home used
for business, taxpayers must use that part of the home:
 Exclusively and regularly as their principal place of
business, as a place to meet or deal with patients, clients or
customers in the normal course of their business, or in
connection with their trade or business where there is a
separate structure not attached to the home; or
 On a regular basis for certain storage use such as inventory
or product samples, as rental property, or as a home
daycare facility.

11. Office in Home Deductions
 Expenses include: mortgage interest or rent, real estate
taxes, insurance, repairs and maintenance, utilities,
depreciation and casualty losses.
 The expenses are pro-rated depending on the
percentage of use calculated.
 Expenses directly related to the office are 100%
expensed
 Deductions are limited to the profit on the business
except mortgage interest and taxes. Other expenses are
carried over to the next year and used if a profit is
shown.

12. Computing the Amount of
Home Office Deduction
 Generally, the amount of the deduction depends on the
percentage of the home that is used for business. The
deduction will be limited if gross income from the business
is less than the total business expenses.
 A taxpayer can use any reasonable method to compute
business percentage, but the most common methods are
to:
 Divide the area of the home used for business by the total
area of the home, or
 Divide the number of rooms used for business by the total
number of rooms in the home if all rooms in the home are
about the same size.

13. Travel and Meals
 Taxpayers who travel away from home on business may
deduct related expenses, including the cost of reaching
their destination, the cost of lodging and meals and other
ordinary and necessary expenses. The actual cost of meals
and incidental expenses may be deducted or the taxpayer
may use a standard meal allowance and reduced
recordkeeping requirements. Regardless of the method
used, meal deductions are generally limited to 50 percent
as stated earlier. Only actual costs for lodging may be
claimed as an expense and receipts must be kept for
documentation. Expenses must be reasonable and
appropriate; deductions for extravagant expenses are not
allowable

14. Entertainment
 Expenses for entertaining clients, customers or employees
may be deducted if they are both ordinary and necessary
and meet one of the following tests:
 Directly-related test: The main purpose of the
entertainment activity is the conduct of business, business
was actually conducted during the activity and the taxpayer
had more than a general expectation of getting income or
some other specific business benefit at some future time.
 Associated test: The entertainment was associated with the
active conduct of the taxpayer’s trade or business and
occurred directly before or after a substantial business
discussion.

15. Gifts
 Taxpayers may deduct some or all of the cost of gifts
given in the course of their trade or business. In
general, the deduction is limited to $25 for gifts given
directly or indirectly to any one person during the tax
year.
 If you give away products as promotions, be sure to
keep track of those separately. They can be advertising
or promotions.
 Items under $4 are not limited.

16. Recordkeeping
 You may choose any recordkeeping system suited to
your business that clearly shows your income and
expenses. Except in a few cases, the law does not
require any special kind of records. Your
recordkeeping system should also include a summary
of your business transactions. Your books must show
your gross income, as well as your deductions and
credits. For most small businesses, the business
checkbook is the main source for entries in the
business books.

17. How long should I keep records?
 The length of time you should keep a document
depends on the action, expense, or event the
document records.
 Call your tax professional for details, but the general
rule of thumb is 4 years. There are many exceptions to
this rule!

18. Family Employees
 Hire your responsible teenage son to keep inventory
for your business or answer the phone. This results in
an additional business expense deduction for you, as
well as income for your child. Be sure to document all
the hours worked by family members (or any employee
you hire) in case you are ever audited.

19. In conclusion:
 By having a home-based business you can enjoy
substantial tax deductions.
 Keep excellent records. I find those that wait until the
end of the year miss many expenses.
 A home-based business also is more productive as you
do not have commute times etc.
 It is much easier to attract business builders due to the
low overhead and startup costs.