Home Office Deduction and Capital Gains Tax Deduction
Small home office/home based business refers to an area of business which involves up to ten employees. It may be located at home, on the internet, in a shared space rental, in a library, or in a coworking space. Home office business is ideal for many people like stay at home parents, full-time students, those who do not want to travel or take time off work, those who are separated from friends and family, those who do not have much money to spare and others. For a home-based business owner, the benefits include being able to work at your own pace, control the quality of your work, save on travel expenses, not having to worry about establishing a good rapport with your fellow employees, saving on purchasing expensive office supplies, saving on operating expenses, and more.
The first thing to do before deciding to run a home office is to decide the purpose of the business use of the office. You can determine the purpose by determining whether you will be using it for official or personal purposes. In this regard, you must also understand how much IRS tax you will be required to pay on the income you earn.
If the purpose of running a small business out of your home offices is to earn extra income, you are free to use your home office space for any business activity related to the particular activity for which you will get paid. However, if the purpose of running your home office is to make an honest living from it, you are required to pay tax on the income you earn. In order to ascertain how much you will have to pay tax on the income you earn, you need to add up the amount you earn every month including your dependents, your residence rent, mortgage interest, insurance premiums, and other miscellaneous expenses such as internet and telephone costs. Add up all these amounts and the result is your taxable income.
Then calculate the amount you will have to pay as taxes on that income. Add the mortgage interest and insurance premiums to the total to arrive at the taxable part. Add your deductible expenses also to arrive at the total. The number of years you will live to operate your home office will be a good measure of your future taxable income. The longer you will live to do the business activities related to your home office, the lower your taxable income will be in future years.
It is obvious that some self-employed persons may choose to work on commission, while others may choose to work on salary, thereby ensuring that they pay no taxes at all. Some self-employed people run their home offices as a sole source of earning money, while others conduct their business from various places, both residential and non-residential. Hence, some self-employed individuals run their businesses through their residence. They may choose to rent a furnished office, buy a laptop computer, and other necessary office equipment. However, individuals who run their home offices out of their homes to enjoy many other advantages, such as being able to deduct the cost of running a business out of your home.
If you are an employee who is paid by the salary or as an hourly wage, you might be eligible for the home office deduction. If you have made enough contributions to your retirement plan and if you have been working for the same employer for more than 5 years, you might qualify for the self-employed expenses deduction. You have to keep your receipts for all your expenses incurred during the year, if you make contributions to your retirement plan. However, you might not deduct expenses incurred in connection with a particular trade or industry in the tax year in which you got your income.
If you run your business purposes into your home office, there are a number of other items that can be deducted as business expenses. Home office furniture and supplies, telephone expenses, computer expenses, Internet costs, home office expenses for meetings and conferences, travel expenses and many other items can be deducted as business expenses as tax deduction. There are different rules applicable in case of travel expenses. For example, you have to include all the air tickets, hotel accommodation and transportation costs in your calculations. All the usual commuting expenses cannot be deducted under the above categories, even if you are running your business from home.
The basic principle underlying both the home office deductions and the capital gains tax deduction is the reduction of taxable income through the use of deductible expenses. Like a CPA, you have to produce the books of accounts and keep records for every trade or transaction that takes place in the course of business. The books and records will not be of any help to you when tax year is not over. You must rely solely on the accounting records submitted by you in support of your tax return.
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