One of the beauties of engaging in a home business is tax deductions. Tax deductions are not what they once were. To be eligible for business related deductions today, you must use that part of your home claimed exclusively and regularly as either the principal location of your business, or place reserved to meet students or customers. For example, if you use your den or a spare bedroom as the principal place of business, working 8:00 to 5:00 every day, but permit your children to watch TV in that room during evening hours, the IRS dictates that you cannot claim a deduction for that room as your office or place of business.



There are, however, a couple of exceptions to the exclusive use rule. One is the storage on inventory in your home, where your home is the location of your trade or business, and your trade or business is the selling of products at retail or wholesale. According to the IRS, such storage space must be used on a regular basis, and be separately identifiable space.

One more interesting exception applies to daycare services that are provided for children, the elderly, or physically or mentally handicapped. This exception applies only if the owner of the facility complies with the state laws for licensing. To be eligible for business deductions, your business must be an activity undertaken with the intent of making profit. It's presumed you meet this requirement if your business makes a profit in any two years of a five year period.

Once your business makes it this far, you can deduct business expenses such as supplies, subscriptions to professional journals, and an allowance for the business use of your car or truck. You can also claim deductions for home related business expenses such as utilities, Internet connection, and in some cases, even a new roof for your home.

The IRS is going to treat the part of your home you use for business as though it were a separate piece of property. This means that you'll have to keep good records and take care not to mix business and personal matters. No specific method of record keeping is required, but your records must clearly justify the deductions you claim.

You can begin by calculating what percentage of the house is used for business, either by number of rooms or by area in square footage. For example, you use one of the five rooms for your business, the business portion is 20 percent. If you run your business out of a room that's 10 by 12 feet, and the total area of your home is 1,200 square feet, the business space factor is 10 percent. But, if your business is a home day care center, it will then become one of the exempted activities in which the exclusive use rule doesn't apply. Check with your tax preparer and the IRS for an exact determination.

If you rent, you can deduct the part of your rent which contributes to the business share of your house or apartment. Homeowners can take a deduction based on the depreciation of the business portion of their house. There is a limit to the amount you can deduct. This is the amount equal to the gross income generated by the business, minus those home expenses you could deduct even if you weren't operating a business from your home. For example, real estate taxes and mortgage interest are deductible regardless of any business activity in your home, so you must subtract from your business gross income the percentage that's allocable to the business portion of your home. This figure will give the maximum amount for

home related business deductions.

The IRS emphasizes those claiming home business deductions does not automatically trigger an audit on your tax return. Even so, it is always wise to work meticulously within the proper guidelines, and of course, keep detailed records if you claim business related expenses when you are working out of your home. If your business earnings aren't subject to withholding tax, and your estimated federal taxes are $100 or more, you'll probably be filing a Declaration of Estimated Tax, Form 1040 ES. To complete this form, you will have to estimate your income for the coming year and also figure out the income tax and self employed tax you will owe.

The self employment taxes pay for Social Security coverage. If you have a salaried job covered by Social Security, the self employment tax applies only to that amount of your home business income, that when added to your salary, reaches the current ceiling. When you file your Form 1040-ES, which is due mid April, you must make the first of four equal installment payments on your estimated tax bill.

Another good way to trim taxes is by setting up an Individual Retirement Account. You can shelter some of your home business income from taxes by investing it for your retirement. You should always discuss this aspect of your operation with your tax preparer or a person qualified in the field of small business tax requirements.