If you're among the millions of American homeowners plugged into one of the most powerful real estate-related trends underway in 2000--the use of your home for business purposes via telecommuting and the Internet--the federal government has some fresh, money-saving tax advice for you.
According to federal estimates, more than 12 million Americans--1 out of every 11 workers--use their home for earning income, either part time or full time. High-tech and Internet-related home business ventures are "leading the revolution that is reshaping the economy" says Rudy Lewis, president of the National Association of Home Based Businesses.
"The home increasingly is going to be the focus of more entrepreneurial activity as technology frees people from dependence on downtown and suburban workplaces," says Lewis. And with that far heavier use of housing as income-generating property will come a major new opportunity to save on taxes by treating the home partially as business space.
To help provide assistance to homeowners already involved, or planning to take part, in this shift, the Internal Revenue Service has just revised its guidelines covering use of the home for business purposes. Tops among the important changes for home-based entrepreneurs are "Section 179" deductions for computers, furniture and related business equipment. Home-based business owners filing for tax year 1999 this spring will be able to write off up to $19,000 worth of qualifying equipment. The limit for tax year 2000 will be $20,000. However, computers, photographic, video-recording and similar electronic devices that have potential for entertainment or nonbusiness recreational purposes will have to be used more than 50 percent for business purposes to qualify for the deduction.
Most home-based entrepreneurs use only a fraction of the space within their houses to run their businesses. Provided they pass the IRS's tests, they can write off the pro-rata expenses they incur heating, cooling, financing, insuring, repairing and maintaining that portion of their house against their business income. They can also claim depreciation write-offs against that same portion of the house itself.
For example: You run a small part-time Web site-consulting service from a spare bedroom and gross $50,000 for the year; the bedroom represents one-sixth of the total improved square footage of your house. You can deduct one-sixth of the otherwise nondeductible housing expenses--utilities, security system, property insurance, repairs and other home-related outlays that support your business use of the bedroom. Mortgage interest and real estate taxes are deductible pro-rata against your business income, but since they're also deductible against your personal income, you have a choice as to where you claim the write-off.
If one-sixth of the cost of maintaining and running your house--plus depreciation--comes to $10,000 for the year, your taxable net income will be $10,000 less because of the deductions. But how do you know whether that bedroom home office for your Internet service actually qualifies for these federal tax benefits? The key rules are:
* The office or work space must be "exclusively" used for business purposes (including storage of inventory or products), and it must be used regularly for your trade or business.
* The business portion of your house must be one of the following: your principal place of business; a place where you meet or deal with customers or clients in the normal course of your business; or a separate structure, unattached to your house, that you use for business.
Under recently liberalized rules, the IRS now allows you to define your home business space as your "principal place of business" if you:
* Have no other fixed location where you conduct substantial administrative or management activities for the business.
* Use your home business space regularly and exclusively for administrative or management activities.
Say, for instance, that in your Internet consulting service you spend most of your time outside the office, at clients' offices or homes. As long as you have no other place but your "business bedroom" where you manage and run your business--and you pass the exclusive and regular-use tests--you may qualify.
Because the IRS's rules are complex and can differ depending on the nature of your home-based business, consult IRS Publication 587 (online at www.irs.gov). And be sure to seek professional tax counsel if you have any doubts.