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When you can count a home office as a deduction

Tax time is among us and it has Michigan residents getting ready to file returns for both their personal finances and those for their businesses. Many small business owners have chosen to structure their companies as a sole proprietorship, where business finances are lumped in with personal finances. Sole proprietorships are actually the most common form of business in the country.

Both profits and losses of a business wind up on an individual's own tax return (recorded on Schedule C). This can often be a breeding ground for discrepancies as filers determine what sort of deductions might be earned through the company. The IRS tends to key in on filings from sole proprietorships because they are a big contributing factor in the United States' tax gap.

One big deduction sole proprietors aim for is a home office deduction. This is entitled by individuals that have an area in their home that he or she uses as a workspace. For this reason, the filer can deduct some of their home expenses like mortgage interest and utilities. A sole proprietor that operates from home can also claim mileage as a deduction, as well.

However, when it comes to the home office deduction, you have the IRS's full attention. In fact, this is where many sole proprietors mistakenly, or falsely, make deduction claims most frequently, so it is heavily scrutinized.

One way to determine if the home office deduction truly applies is if the workspace in the home is used only for business. While it does not have to be an entire room, it does have to be used for business and business only.

The workspace must also be used consistently. These are the rough perimeters for the deduction and it may be wise to consult an expert to make sure you are accurately recording information on a tax return.

Source: The Journal, "Home office deductions can be dangerous," Brett Hersh, Jan. 29, 2012

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