Home-Based Business


Checklist for Schedule C Tax Deductions
  

Business use of home

Deductible on Schedule A without regard to business use
  • Mortgage interest
  • Property taxes

Determination of business use percentage
  Requires a dedicated area that is not used at all for non-business purposes
Divide square footage of business area by total square footage - determines business use percentage
  

100% Deductible based on 100% business use
  • Depreciation - specific improvements. Real property depreciable over 39.5 years
  • Utilities - separate meter
  • Repairs to specific components
  • Cleaning and maintenance - specific to area

Deductible based on business use %
  • Depreciation - overall cost Real property depreciable over 39.5 years
  • Utilities - not on separate meter
  • Repairs - general
  • Cleaning and maintenance - general

Automobile expenses

Determination of business use percentage
  Maintaining a log of business mileage is necessary to assure that the deduction will be sustained.  The total number of business miles is compared to the odometer readings for the year to get a business use %
  

Option 1 - Standard mileage method
  Deduction determined as a product of total business miles times the standard IRS approved mileage rate. For 2006 the business milage rate is $0.445/mile. See information for medical, charitable and moving milage rates.
  

Option 2 - Actual expenses method


Deduction based on business use % for each item
  • Lease payments Note that leases of cars costing more than a modest amount require an "inclusion" amount to be added to income
  • Depreciation
  • Write-off of the cost of the car over 5 years - limited by luxury auto rules unless auto weight is 6,000 pounds or greater
  • Gasoline
  • Repairs
  • Maintenance (cleaning / oil change / etc.)
  • Insurance
  • Taxes (license fees)

100% Deductible based on 100% business use
  • Parking
  • Tolls

Supplies and other purchases

Require special attention - potentially large deductions
  • Equipment purchases - Section 179 Up to $105,000 in 2005 first year write-off, limited to net profits
  • Equipment purchases - Depreciation If not taken under Section 179 - Write-off of the cost of the equipment over a specified life - usually 5 years for computers and 7 years for other equipment
  • Software purchases Amortized over a specified life - usually 5 years - unless the purchase is specific to the current year, such as tax preparation software

100% Deductible based on 100% business use
  • Office supplies
  • Operating supplies
  • Dues & subscriptions
  • Postage / delivery
  • General insurance
  • Software updates / usage charges
  • Note that software purchases with a useful life of more than one year are amortized over 5 years
  • Business licenses and taxes

Services

100% Deductible based on 100% business use
  • Labor - contractors
  • Commissions paid to sales reps
  • Rental of equipment
  • Rental of storage facility
  • Printing
  • Payroll processing
  • Repair of business equipment
  • Bank charges

Deductible based on business use %
  • Telephone - first line into home: Not deductible
  • Telephone - additional business lines: Totally deductible
  • Telephone - long distance charges: Deduction for business calls
  • Internet service provider charges: Allocated based on business use
  • Legal: Only as it relates to the Schedule C business - legal costs related to capital assets must often be capitalized
  • Accounting: Only as it relates to the Schedule C business - may require allocation between Schedule C and personal activities
  • Consultants / computer specialists: Only as it relates to the Schedule C business - major projects such as software development must be deducted over the life of the asset

Employment

100% Deductible based on 100% business use
  • Salaries paid
  • Payroll taxes
  • Workers compensation insurance
  • Employee insurance
  • Employee retirement contributions
  • Other employee benefits
  • Sales & Promotion

100% Deductible based on 100% business use
  • Advertising
  • Entertainment Limited to 50% of cost
  • Business gifts Limited to $25 per recipient
  • Travel - other than meals
  • Meals Limited to 50% of cost

Inventory purchases
  New Rule: Small Companies (average revenues under $1,000,000) can deduct purchases of Inventory on a cash basis if they are otherwise on the Cash Method of Accounting and if using the Cash Method for inventory does not distort their earnings - Consult your tax advisor