Tax deductions plentiful for home entrepreneurs

Posted 3/31/09

As job prospects become more scarce in today’s flagging economy, more entrepreneurial workers have turned contractor or started new businesses in …

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Tax deductions plentiful for home entrepreneurs


As job prospects become more scarce in today’s flagging economy, more entrepreneurial workers have turned contractor or started new businesses in their homes. Some have even become independent consultants for the very companies that laid them off.

Turning the lemon of unemployment into the lemonade of becoming your own at-home boss is no nap on the couch. But as April 15 approaches, there are a number of tax advantages that may be even more appealing than creating a spreadsheet in your slippers.

“There’s an awful lot more people working from home than in the past,” said Brenda Sherman, president of Integrity Accounting and Tax Services in Littleton. “And the IRS has not been as wishy-washy about the home-office deduction lately. For years, the common taxpayer was confused. Whereas now, the rules have been in place for three or four years and it’s a little more easy to understand.”

A home office is eligible for a slew of potential write-offs — but only if the workspace is used regularly and exclusively for business-related activities. That means no pool table or television in the home office, unless your “business” is professional pool player and TV critic.

“When I first started my business and I was working from home, my bookcase in my office had all these books about how to repair plumbing and lay a hardwood floor,” said Sherman, a certified public accountant. “If the IRS were to come in and audit, they could have said that room was not used exclusively for business.”

Those with qualifying home offices cannot only deduct the cost of their office equipment and furniture, but can also deduct a percentage of such expenses as homeowner’s insurance, utilities, a new water heater or furnace, home repairs, security systems, snow removal, lawn care and more.

The larger the home office space, the greater deduction a home-based entrepreneur can take on what would otherwise be nondeductible homeowner expenses. For example, if your office constitutes 10 percent of your home space, you can deduct 10 percent of those “indirect” expenses.

When one paints, puts in new carpet or otherwise refurbishes a home office, that cost is a “direct expense” and is entirely deductible.

There are a number of other potential tax advantages for home-based workers, especially those who are willing to keep a copious record of their daily activities. If you leave your home to go to the office-supply store or meet a client, the mileage is deductible..

The CPA is quick to offer this caveat, however: Schedule C used by home-based contractors to document deductions is among the tax forms that are most routinely audited by the IRS. And while there is some gray area in the rules for home work spaces, many of the lines are clearly drawn, according to Sherman.

“For instance, I had a client who said their whole house was a business purpose,” she recalled. “I said, ‘I’m sorry, but I’m not going to be the one signing your return. Where do you eat? Do you sleep at night?’ Where do you do that?’”

Home entrepreneurs also need to be careful about deducting their computer and cell phone expenses because such items are often used for both professional and personal purposes.

“I can pretty much guess that any child in elementary school is having to come home and use the computer,” Sherman said.

It is not just self-starting entrepreneurs who can take home-office deductions. Employees who routinely work out of their homes may also in some situations be able to make similar, if more limited, deductions if their expenses are greater than 2 percent of their adjusted gross income and they are working in their homes at the convenience of their employer.


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