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Declaring a Home Office for your Online Business
By Darrin Mish
When it comes to tax obligations, all businesses, regardless of the kind, are in the same standing. The IRS requires everyone, specifically entrepreneurs, to report all of their income, file their tax returns and pay all applicable fees. This order extends to business transactions that are primarily done online. Fortunately, many tax benefits, and even loopholes, that apply to regular offline ventures can also be used in online businesses. Knowing what these are, is specifically significant for you to avoid dealing with IRS problems in the future. Having a home office is among the major tax breaks that online entrepreneurs can take advantage of. Often, online businesses are carried out at home, thus, depending on specific requirements, business owners can actually qualify for these significant tax deductions. They just have to take note that for a house to be considered as home office, it should be regularly and exclusively used for business purposes. For example, a dining room used by a family to have dinner in the evening and used as an office during the day will not classify under this tax deduction. For it to qualify as a home office, a particular space or room must be mainly used for business, like daily operations and client meetings. Although you're given leeway in dividing the time spent for each room, whether business or personal, you might want to keep it simple. For example, it is a better alternative to claim that the room is solely used for business rather than say that 75% of the time, it is used for business operations and 25% of the time, for family gatherings. This way you won't attract IRS problems into your doorstep. You should also prove to the IRS that your home office is your principal place for business. Basically, since online businesses are done at home, business owners will have no problems meeting this stipulation. This requisite is just presented for the IRS to ascertain that activities done in the home office are not also carried out in rented offices. These are the two major requirements for a home office and when these are met, you will be able to deduct many of the costs that are associated with both your office and your home. These include items such as rent or mortgage payments, insurance costs, utility bills, and property taxes. Obviously, though, you are not allowed to deduct all of your rent, or all of your mortgage payment. The way it's done is usually through a percentage guide. If your office takes up 25% of your home, and your mortgage payment is $1,000 monthly, then you would be able to deduct 25% of that $1,000 which is $250. In a year, you can actually save up to $3,000. This is practically how you should deduct expenses related to your home office. Keeping all of your documents for your online business will definitely go a long way towards avoiding IRS trouble. There are some restrictions related to your online business tax deductions. For instance, you cannot accumulate so many deductions that you record a net loss for a given tax year. For instance, if you have $60,000 worth of deductions and only have $50,000 in revenue, the $10,000 net difference cannot be claimed or filed. You may, however, declare a net gain of zero. |
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