Home businesses and operating expenses: learn to save money
If you run a home business your biggest source of deductions is most likely going to be your operating expenses. These expenses include things like home office expenses, business supplies and traveling expenses. Let’s take a look at how the tax code treats operating expenses and how you can take full advantage of the deductions available for you.
What is a home operating expense?
The amount of home operating expenses is so vast that the tax code could not possibly list them all. Instead, the tax code has a list of factors that the expense must meet in order to be deductible. These factors are:
- Ordinary and necessary
- Directly related to your business, and
- Reasonable in amount
Ordinary and necessary
According to case law this means that the cost must be common and also helpful and appropriate for the business you are conducting. The cost doesn’t have to be indispensable; it need only be helpful to your business in some way. Some common types of operating costs are:
- Home office expenses
- Equipment rental
- Legal and accounting fees
- Car and truck expense
Generally the IRS will not challenge whether an item is ordinary and necessary unless it appears to have absolutely no legitimate purpose.
Only current expenses are deductible and that means it must be an item that will benefit your business for less than one year. These are the costs of keeping your business going on a day-to-day basis. A good example of a current expense is your monthly internet bill, a service that benefits you for one month and then expires. However, if you buy a computer it is not a current expense because it will benefit you for more than on year. Things like computers, cars or phone are capital expenses and are deducted differently.
An expenditure must be directly related to your business to be deductible as a business operating expense. This means that you cannot deduct personal expenses. Oftentimes the lines between business and personal expenses can be blurred, such as the use of a computer to conduct business and to play computer games. Sometimes you can deduct just the portion of the item used for business. The IRS has complicated rules in this area so be sure to conduct some of your own research.
Reasonable in amount
As long as the amount is reasonable and you do not deduct more than you spend, there is no limit to how much you can deduct. The IRS does place limits on certain things, but generally an expense is reasonable unless there are more economical and practical ways to achieve a result.
If you run a home business, take advantage of the operating expenses that are deductible. There is no itemization of deductible expenses just a four-part rule requiring the expense to be ordinary and necessary, current, business related and reasonable in amount. For more information regarding operating expenses contact a local business attorney.
 Stephen Fishman, Home Business Tax Deductions: Keep What You Earn, 65-76 (Diana Fitzpatrick ed., Nolo 7th ed. 2011).