IRS Publication 334, Tax Guide for Small Businesses, isn’t exactly light reading, but it does provide the key tax information you need to know if you run a home-based business.
To claim business expenses for use of your home you have to use the business part of your home exclusively for your business on a regular basis. It has to be your principal place of business-where you meet or deal with patients, clients, or customers in the normal course of your business, or a separate structure (not attached to your home) you use in connection with your business.
You won’t meet the exclusive use test if you use part of your home to store inventory or product samples or as a daycare facility. Your home office will qualify as your principal place of business if you use it exclusively and regularly for the administrative or management activities, and if you have no other fixed location where you do that. You do not meet the regular use test if you use the area for business only occasionally or incidentally, even if you do not use that area for any other purpose.
If you make a profit, you can deduct all of your business expenses related to the use of your home, but if you don’t make money your deduction for certain expenses for the business use of your home are limited, so be sure to check exactly what you can and can’t deduct.
IRS Publication 535 explains under what circumstances the following are deductible:
- Advertising
- Clean-fuel vehicles and refueling property
- Donations to business organizations
- Education expenses
- Environmental cleanup costs
- Impairment-related expenses
- Interview expense allowances
- Licenses and regulatory fees
- Moving machinery
- Outplacement services
- Penalties and fines you pay for late performance or nonperformance of a contract
- Repairs that keep your property in normal efficient operating condition
- Repayments of income
- Subscriptions to trade or professional publications
- Supplies and materials
- Utilities
Typically you can’t deduct the following as home-based business expenses.
- Bribes and kickbacks
- Charitable contributions
- Demolition expenses or losses
- Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs
- Lobbying expenses
- Penalties and fines you pay to a governmental agency or instrumentality because you broke the law
- Political contributions
- Repairs that add to the value of your property or significantly increase its life
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