Running a home-based business can be a rewarding endeavor, especially when you take full advantage of all possible tax deductions. One commonly misunderstood example is the home office deduction. As long as you use your home office entirely for your business, you can usually deduct it. This holds true even if your startup didn’t turn a profit.
Taking a Quick Look at Tax Losses
If you lacked income from your home-based business, it may have been because you launched your new startup late in the year. You likely have expenses, but don’t yet have income. This creates a tax loss that you can carry forward to the following year. You’ll also have a tax loss that you can carry forward if you’re running an established home-based business that had a poor year, fiscally speaking, provided that your expenses were greater than your income.
Filing Your Tax Return with a Tax Loss
You might have been told that you shouldn’t file a tax return if you had a tax loss from your business. However, it’s far more advantageous to file a return because it creates future benefits. By carrying forward your tax loss from one year to the next, you’re reducing the taxes for the following year. However, if you failed to file a tax return because of the net operating loss (NOL), the IRS won’t know about it and so you won’t be able to carry the loss forward.
Understanding How a Home Office Affects Business Miles
Failing to claim a home office deduction for a year with a NOL is problematic for another reason. It prevents you from taking full advantage of your business miles. If you don’t claim a home office deduction, you officially have no home office in the eyes of the IRS. That means every time you leave home on business-related matters, your trip is treated as commuter miles—not business miles, which you could deduct. For example, let’s say you have a client who lives 10 miles away. You drive from your home office to the client’s home and then back to your home office. Those 20 driving miles are all commuter miles, and you cannot claim them as deductible vehicle expenses because the IRS thinks you don’t have a home office. If you do claim the home office deduction, then you could also claim those 20 miles as business miles.
Need clarity on tax situations that affect your home-based business? The Royce CPA Firm in Tucson offers a complete suite of services, including those tailored specifically for new startups. Schedule an appointment online today—and bring your questions!