Editor’s note: Michelle Stockman works with Little Rock-based Arkansas Capital Corp. to promote entrepreneurship development around the state. Stockman earned a bachelor’s degree from Loyola University-Chicago in communications and fine arts, and earned a master’s in entrepreneurship from Western Carolina University. Her thoughts on business success appear each week on The City Wire.
I nor this publication are accountants; therefore the advice about to be given should be verified with a professional accountant or tax preparer.
Given that we are in the midst of tax season, it is less than a secret that small business owners typically get abused by the U.S. tax system. Due to the size, revenue and production of small businesses, finding relief in taxes tend to fall through the cracks.
For the home-based business, deducting rent/mortgage interest, insurance, utilities, repairs, auto mileage, business dining, travel and supplies are wonderful reasons to keep exceptional records and receipts. Talking to an accountant before starting the home-based business to see what expenses to track for tax reasons is a habit to start and continue as tax laws change yearly.
Despite the fun deductions one can take with a home-based business, there are a few exceptions to note. First, the expenses you are deducting must be used exclusively for the business, no exceptions. You cannot use your office to fold laundry, store toys, utilize as a guest room or any other function other than to run your business. Also check with your accountant on the percentage of your home that you can use as your home office.
Secondly, your home office must be the principal place of business. You can not claim a home office if you decide to work from home on a rainy day. You can not store files or paperwork in a room within your home and claim it as a home office deduction.
A home-based business needs to show profitability within three years in order to maintain the right to claim business deductions. If your business is not profitable within that time period, the IRS will consider your business as a hobby and you will be unable to claim your business deductions.
Lastly, new tax laws state that if you deduct home office expenses, you may not get the full benefits of the tax exclusions when you sell your home. So the percentage of your home that you have claimed for home-based business deductions will be excluded from being considered part of your residence when and if you sell the property.
Stockman can be reached at email@example.com