PEMBROKE, Mass. — The time to do our taxes is once again upon us. Very few of you do your own taxes, but it helps to understand the process.
It helps because there are decisions, before year’s end, that you can enact that will affect your bottom line, and thus your tax liability. It helps because often a sizable check goes out to the government, and it’s good to know why the sum is what it is.
This year, we’re focusing on three expenses: the home office deduction, depreciation, and other expenses.
HOME OFFICE DEDUCTION
Every business owner should consider taking a home office deduction. If you use a fixed space in your house to do paperwork, to pay bills, and to contemplate business strategies, you are entitled to take a home office deduction.
There are caveats—the space must be used exclusively and regularly, and it must be your principal place of business.
You probably have an office at your store. But you could argue that your store office is not adequate to do administrative work—it’s too noisy, too small, too disruptive—and therefore your home office becomes your de facto principal place of business.
Here’s how to compute your home office deduction: Take your total home square footage (exclusive of basement and attic), and divide by the space given to the home office.
An added plus of having an established home office is that you can count other space in the house that is not used exclusively and regularly.
So if you live in a 1,500-square-foot house, and you use one 10-by-12 room for your home office, and if you store catalogs, paperwork, chemicals, etc., in another section, using 300 square feet, that computes to 1,500 divided by 150 feet (10 x 12 = 120 feet, plus 30 feet for storage), to come up with 10%. This means that you can take 10% of all house expenses as your home office deduction.
Next, tally up all house costs, including mortgage interest, property taxes, insurance, utilities, water, garbage disposal, repairs and maintenance. Add depreciation, which will require an accountant to compute.
Say the total house costs are $20,000, then the home office expense portion is the percent use multiplied by the cost. In the above example, it’s $20,000 x 10%, or $2,000. This is your home office deduction. It is an expense, just like wages and supplies.
The best part of a home office deduction is that you didn’t have to write out a check. It’s a cost of the home, which would be spent whether you counted it or not.
Check back Thursday for the conclusion!
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].