Home Free

Smart Deductions

To be deductible, your home office must be used "exclusively and regularly" as a home office--and not do double duty as a bedroom or playroom. It must also be the principal place your business functions are performed, or at least the site of significant administrative or managerial functions such as paperwork, billing, appointments and other record-keeping duties.

If your situation fits, a percentage of your monthly mortgage or rent can be deducted as a business expense. Say the room you use solely for business is 100 square feet, and your home is 1,000 square feet. Your home office takes up 10 percent of the home. Just using the corner of a room isn't deductible, according to IRS guidelines, says Lewis Weinstein, president of TaxLogic (http://www.taxlogic.com), an online tax service.

Using IRS Form 8829, compute the allowable, deductible share of utilities, maintenance, real estate taxes and insurance, mortgage interest and other expenses. Business telephone lines--or business calls made on personal lines--are often completely deductible. IRS Publication 587, Business Use of Your Home, explains the nitty-gritty. (Call 800-829-3676 or download it at http://www.irs.gov)

While deducting your home office reduces the amount of income your business pays taxes on, it also reduces the cost basis on the residence. That means greater capital gains liability when you sell your home. (If you rent, you're off the hook.)

Whether or not you take the home office deduction, office furniture, equipment and supplies are all deductible--just keep your receipts. And if you entertain customers at the home office (and such visits are allowed by municipal zoning), home upkeep might be partially deductible.

A tax deduction for health insurance premiums is being phased in over the next several years. By 2003, you will be able to deduct 100 percent.

Trina Pulliam, founder of SOHO Station, an association for people who work at home, says she saves $1,000 a quarter by doing her own taxes with QuickBooks (http://www.intuit.com) and accounting software from Peachtree (http://www.peachtree.com). Don't think you're that tax-savvy? Consult an accountant or tax attorney for specifics on your situation.

Contact Sources

All Things Equal Inc., (305) 538-1103, http://www.loadedquestions.com Casco Bay Herb Co., (207) 829-4071, soapmaker1@aol.com McCarthy Communications Inc., 5022 Klingle St. N.W., Washington, DC 20016, mccomm@clark.net Jeffery Zbar (jeff@goinsoho.com) is the author of Home Office Know-How (Upstart Publishing, $12.95, 800-235-8866) and publisher of Home Office Success Stories, a free e-zine about working from home (http://www.goinsoho.com).

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This article was originally published in the June 1999 print edition of Entrepreneur with the headline: Home Free.

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