|FORTUNE Small Business:|
Write-offs for your home business
Ask FSB checks in with tax experts for details on what home-businesses owners can deduct.
(FORTUNE Small Business) -- Dear FSB: I have a small Web design business. How do I write off supplies (especially computers, software and electricity) for the business knowing that I also run my home items on the same computer? What percentage can I write off?
- Bill G., Fountain Valley, Calif.
Dear Bill: At some point nearly everyone running a home-based business asks the same question - how do I mark where work ends and life begins, and what does that mean come tax time?
"There's two ways to look at it," says Grafton "Cap" Willey, past chair of the National Small Business Association and a senior partner with Tofias PC, a New England accounting and professional services firm. "There's the technically correct way, and the practical way."
The technically correct way is for you to log exactly the time spent using the computer - and whatever other equipment you use - for business and for pleasure.
But if the thought of whipping out a pencil every time you surf over to check out the latest on Hockeyfights.com between now and retirement has you running back to 9-to-5-land, don't worry. Your record doesn't have to be that exact.
"The reality is most small businesses can't be that detailed or focused, so the IRS takes a more reasonable approach," Willey says - though it's always possible that an IRS auditor in a cranky mood could decide to quibble.
The reasonable way is to estimate how much you use the computer for work (say 50% of the time) - or, in the case of the electric bill, what percentage of your home's square footage is used for the business - and deduct accordingly.
Paul Stappas, a small business consultant for more than 30 years and founder of Bookkeeping Administration Management in Neshanic Station, N.J., agreed.
He explains that you can deduct electricity, gas, and other expenses also used to run your business based on the percentage of your home that is used for an office.
"For example, if the office comprises 12% of your home, then you can deduct 12% of the house expenses, including mortgage interest, house cleaning, repairs, home insurance, etc," Stappas says. "In addition, you could depreciate your office space. Bear in mind that to qualify for such deductions, you must use a specific area of your home exclusively for your trade or business."