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Most small business owners start out with running their business from home. An advantage of running your business from home is that you may qualify for taking a tax deduction for the business use of your home. There are several qualifications that you must meet in order to qualify for this deduction.

The first requirement you must meet is that your “office space” or the room you use for your home office must be used regularly and exclusively for your business. When you use the space “exclusively” for business you are stating that this is the only thing you use the space for. It is important to keep in mind that if you use the space for anything else, such as an exercise or TV room, it does not meet the exclusively test. If it does not meet this test you cannot take the deduction.

However, there are a few exceptions to this rule. The exception you as a small business owner would find most valuable is storage. You will be allowed to take the home office deduction even if the space is used for both personal and business storage. If you use the space for storage for your business as well as storage for personal use you will be allowed to deduct the storage space as a home office deduction as long as you do not have another principal place of business. However, you will need to allocate the space between personal and business use.

Your home office will need to meet at least one of the following criteria in addition to the “exclusively” test in order to qualify for the deduction; your home is your principal or main place of business, it is a place where your customers meet with you in the normal course of your business, or it is a separate structure that is detached from your home that you use exclusively for business.

To figure out the percentage of your home expenses you can take as a deduction you take the total square footage for the area of your home you use exclusively for business, including any storage space you may use. Divide the total square footage of the area of your home used exclusively for business by the total square footage of your home. This number is the percentage of business use of your home. This is the figure you will use to calculate the amount of expenses you can deduction for your home office deduction,
You will need to divide all of the expenses incurred to maintain your home and home office for the year into two categories, direct and indirect. Direct expenses are specific expenses to your home office and are not related to any other portion of your home. All direct expenses are deductible. An example of a direct expense would be repairing a fixture that is only in the space you use for your home office. Most of the time you will only have indirect expenses. Indirect expenses are the expenses that will benefit your entire home such as utilities and property taxes. These expenses will be multiplied by the percentage of your home used for your home office and be allowed as a deduction.

Tax season can be a stressful time for the small business owner. It is the beginning of a new fiscal year in most cases and filing business taxes is not something most business owners want to deal with. Most small business owners file their taxes on a Schedule C, which is used for sole proprietors and limited liability companies with only one owner. Due to the widespread abuse of the Schedule C, it is the tax form that is most likely to be audited by the IRS. There are several ways you can prepare for the tax season to ensure that your tax season goes smoothly with a limited amount of stress. Even if the IRS elects to audit your business these tips will leave you prepared and worry free when it comes to filing this tax season.

Report all income when filing your business’s taxes. Even if you do not receive a form 1099 income must be reported. When you are in the business of selling merchandise all sales must be reported. If during the year any discounts or returns took place these can be used to offset the sales reported. If your business performs services all service revenue must be recorded. Even if your business receives money from something that is not a direct result of business activity you must report this income. For example, if your business earns money through a raffle this income must also be reported on the tax return. It is important to include all business income incurred throughout the year.

Keep track of all business records. Keeping track of all business transactions allows for you as a business owner to easily access which business expenses are tax deductible. Records such as invoices, receipt books, credit card sales slips and cancelled checks should all be kept as documentation. Make sure you have some sort of documentation for every expense you claim on your taxes. Keeping records of all business expenses ensures that if the IRS chooses to audit your small business, you will have documentation to back up all deductions taken.

Purchase small business accounting software. Most accounting software that is offered for small businesses includes a feature that automatically calculates business income and expenses for tax purposes. Having some form of accounting software will help you to keep an accurate record of all your business income and expenses.

Following these tips will help your tax season run smoothly. If you choose to use an accountant to perform your small business taxes, being organized will reduce the amount of time it will take them to produce and file your return. The less time it takes them the less money it will cost you. If you choose to file your business’s return yourself, being organized will save you time and the frustration of figuring out all your small business expenses and income for a year. Whether you use an accountant or perform your tax services yourself these tips can help save you time, money and stress!