Dear IRS: I work from home, and my dogs like to hang out in my office. I recently bought a new (and rather expensive) dog bed so they would be comfortable while I make my conference calls. Can I deduct the dog bed as a tax deduction? Sincerely, Jeff
Dear Jeff: The office space where they hang out qualifies, if your office space meets our qualifier. Sorry, the cost of their bed does not. Sincerely, Your Friendly IRS Agent.
If you are starting a business or work as a home entrepreneur, you might have similar questions about what is and what is not deductible when you file your taxes. While dog beds don't quality, some costs to operate the office certainly do.
According to Forbes, the biggest issue with home office tax deductions is -- this is true -- not enough home entrepreneurs take their due deductions. Although an estimated 26 million Americans have home offices, just 3.4 million taxpayers claim home-office deductions.
Too many home office jockeys mistakenly fear that erroneously claiming a home office deduction might trigger an audit.
So, what qualifies?
The most significant deduction opportunity is your office space. You can get credit for the place where you set up shop in your home.
However, before trying to determine what you can claim as a legitimate business expense, the Internal Revenue Service says you must first prove your home office is, in fact, a "home business."
The IRS uses two "qualifiers":
1. Regular and Exclusive Use.
"You must regularly use part of your home exclusively for conducting business," writes IRS.gov. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.
In the unfortunate event of an audit, you might have a difficult time proving that your family room is a home business if your "office" also includes your wide-screen television and pool table.
2. Principal Place of Your Business.
"You must show that you use your home as your principal place of business," the IRS website says.
In the best scenario, you have a separate structure such as a garage, barn or studio.
Also, if you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.
Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.
If you are still uncertain if your home office qualifies as a home business, the IRS has a rule of thumb: "If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home."
Here are some other eligible tax deductions that entrepreneurs often forget:
You can claim your car expenses by either keeping a list of all of them (gas, repairs), or you can keep track of mileage and receive a 57.5 cents per mile (current rate) credit (plus tolls and parking fees.) If you use your car for business and pleasure, you need to keep track of the percentage of use for each.
Office supplies, advertising, a percent of the utility bills, etc. can be deducted once you are in business. For large purchases such as computers or equipment, you can get a capital expense deduction of $5,000 for the first year and credits for the remaining amount the next 15 years.
Legal and Professional Fees
Getting advice from an attorney and tax professional is expensive, but worthwhile. And their fees are fully deductible.
If the information and operational programs help make your business go -- they can be included as a cost of doing business.
Those business lunches can be very beneficial to negotiating a contract or making a sale. You may deduct 50 percent of the tab, if you talked business. Some entertainment expenses qualify, but the event must take place before or after the business discussion.
If you have to take a plane, stay in a hotel, take a taxi and incur other expenses to make a sale or attend a seminar, the expenses qualify. If your family goes along on the trip, you cannot deduct their expenses.
If you use a line of credit to run your business, the interest can be deducted.
It is highly recommended that you work with a tax professional when determining which business-related expenses qualify.
Besides getting the correct advice, their fees are deductible.
Bright Ideas for Business is an information sharing program of the following community partners: