| Business Use Of Home ¤ Sole Proprietor ¤ Self-Employment Tax |
| Business Use Of Home (from IRS 1999) New rules, that took effect in 1999, make it easier to claim a deduction for the business use of your home. Under these rules, you may qualify to claim the deduction, even if you never qualified before. The following information explains the new rules and gives some examples. Definition of Principal Place of Business from 1999 Your home office will qualify as your principal place of business for deducting expenses for its use if:
There are many activities that are administrative or managerial in nature. Some of these activities are:
Administrative or management activities performed at other locations. Under the new rules, the following activities will not disqualify your home office as your principal place of business.
Other tests. These rules for "principal place of business" will not affect the other tests you must meet to claim expenses for the business use of your home. You still must use the business part of your home both exclusively and regularly for your trade or business. If you are an employee, the business use of your home must be for the convenience of your employer. In addition, your deduction may be limited if your gross income from the business use of your home is less than your total business expenses. For more information see Qualifying for a Deduction and Deduction Limit, earlier. Examples. The following examples describe situations in which an individual's home office will qualify as his or her principal place of business for deducting expenses of its use. Example 1. Self-employed plumber. Most time is spent at customers' homes and offices installing and repairing plumbing. He has a small office in his home that he uses exclusively and regularly for the administrative or management details of his business, such as phoning customers, ordering supplies, and keeping his books. He does not do his own billing. He uses a local bookkeeping service to bill his customers. The home office qualifies as his principal place of business for deducting expenses for its use. He uses the home office for the administrative or managerial activities of his plumbing business and he has no other fixed location where he conducts these administrative or managerial activities. His choice to have his billing done by another company does not disqualify his home office as his principal place of business. Because he meets all of the qualifications, including principal place of business, he can deduct expenses (to the extent of the deduction limit) for the business use of his home. Example 2. Self-employed sales representative for several different product lines, with an office in home used exclusively and regularly to set up appointments and write up orders and other reports for the companies whose products are sold. Occasionally writes up orders and sets up appointments from a hotel room when away on business overnight. To make sales, the Rep regularly visits customers in various territories to explain the available products and take orders. The home office qualifies as a principal place of business for deducting expenses for its use. Administrative or management activities are conducted there with no other fixed location. The fact that some administrative or management activities take place in a hotel room (not a fixed location) does not disqualify the home office as a principal place of business. If you are an employee or self employed, you can use the worksheet in Publication 587, Business Use of Your Home, to figure your deduction. If you are self employed and file Schedule C, you figure your deduction using Form 8829. If you are an employee, you must itemize your deduction on Schedule A (Form 1040) to claim expenses for the business use of your home. Publication 587 has detailed information on the business-use-of your-home deduction. To order publications and forms, call 1-800-829-3676. For complete detailed information visit the IRS web site here: Business Use Of Home Information
You are a sole proprietor if you are the sole owner of a business that is not a corporation. Report your income and expenses from your sole proprietorship on Schedule C (Form 1040), Profit or Loss From Business, or on Schedule C-EZ (Form 1040), Net Profit From Business. You may use Schedule C-EZ to determine your net profit if you have only one sole proprietorship and you meet all the requirements listed in Part 1 of Schedule C-EZ. If you can use Schedule C-EZ, gross receipts from your business and total expenses are reported in Part II. The difference between gross receipts and total expenses you reported is your net profit. Report Net profit on line 12 of your Form 1040. You cannot use Schedule C-EZ if your business expenses are more than a certain amount (check tax office for current maximums), your business used the accrual method of accounting, you deducted expenses for the business use of your home, or if you had employees, a net loss, or inventory. If you cannot use Schedule C-EZ, you must report your business income and expenses on Schedule C. If you have more than one sole proprietorship business, or if you and your spouse have separate businesses, you must use a separate Schedule C for each business. Report the income from your business in Part I of Schedule C and the expenses in Part II. If you make or buy goods to sell, use Part III to figure the cost of goods sold. The difference between total income and total expenses is your net profit or loss, which will be taken from Schedule C and entered on line 12 of your Form 1040. If you deduct these expenses, use Schedule C. If you use part of your home in your business, you should complete Form 8829. For more information, see Publication 587, Business Use of Your Home, Including Use by Day-Care Providers. You may also select Topic 509. If the total of your net profit from all businesses is over certain (very Low Limits) you must pay into the Social Security System by filing Schedule SE (Form 1040). For more information, get Publication 533, Self-Employment Tax, or select Topic 554. If you are new in business, see Publication 1635, Understanding Your EIN - Employer Identification Numbers. Select Topic 103, Small Business Tax Education Program, for additional information on beginning a new business. Publications and forms may be downloaded from this site or ordered by calling 1-800-829-3676.
You usually must pay self-employment tax if you had net earnings from self-employment of $400 or more. Generally, net earnings from self-employment represent 92.35% of your net profit. Net profit is calculated by subtracting ordinary and necessary trade or business expenses from your total self-employment income. You are self-employed for this purpose if you are a sole proprietor, an independent contractor, a member of a partnership, or are otherwise in business for yourself. You can be liable for paying self-employment tax even if you are currently receiving Social Security benefits. If you had a small profit or net loss from your business but want to pay into the Social Security system, you may be eligible to file Form 1040 Schedule SE and use one of the two optional methods to compute your net earnings from self-employment. See Publication 533, Self-Employment Tax, to see if you qualify to use an optional method. This method may also allow you to qualify for the earned income credit or the child and dependent care credit. More information on self-employment tax can be found in Publication 533, which can be ordered by calling 1-800-829-3676. For more complete information visit the IRS web site here: Information About Self-Employment.
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