Tax breaks are a real boon for home business owners. But let’s be clear from the start:

• Be very sure what you can and can’t deduct. Tax software is great but it isn’t foolproof so do your homework and still read the tax booklet for all the deductions about home businesses and perhaps consult a tax accountant. However, using software is a good idea. It really does help you calculate.
• There is a notion, which may or may not be true, that home business deductions can flag you to the IRS. It used to be more true as home businesses weren’t as prevalent. But it’s still somewhat of a flag, thus –
• Have specific, thorough documentation about everything.
• Your home office cannot be used for any personal use at all. No personal emails, writing a letter to your Aunt Sue that’s printed on your home office’s printer unless it’s specifically about business. We’re talking the IRS here. It’s not a good idea to fudge it, even a little.
• Too, you can’t have anything of a personal, non-business nature in this office, not even in the closet.
• After you do your research, you may find that claiming certain deductions for your home business isn’t a good idea. Weigh your options carefully.
• If you have claimed certain deductions in the past, make sure the rules are the same. The IRS changes things sometimes, so make sure you are clear on what’s what for the year you are working on.

Here is what it says on the IRS site:

Whether you are self-employed or an employee, if you use a portion of your home for business, you may be able to take a home office deduction.  Here are six things the IRS wants you to know about the Home Office deduction

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

• as your principal place of business, or
• as a place to meet or deal with patients, clients or customers in the normal course of your business, or
• in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

2. For certain storage use, rental use, or daycare-facility use, you are required to use the property regularly but not exclusively.

3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on line 30 of Form 1040 Schedule C, Profit or Loss From Business.

6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.

For more information see IRS Publication 587, Business Use of Your Home, available at http://www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Links:

• Publication 587, Business Use of Your Home (PDF 214K)
• Form 8829, Expenses for Business Use of Your Home (PDF 64K)
• Form 8829 Instructions (PDF 29K)
• Schedule C, Profit or Loss from Business (PDF 111K)
• Schedule A, Itemized Deductions (PDF)

Do your homework and take the deductions you can. It’s worth it.