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Ask Legal Andrew — The Home Office Deduction

Sep 18, 2008

Q:

Can I take the home office deduction on my income taxes?

A:

We’re finally tackling a question that doesn’t depend upon your local laws. The home office deduction is strictly controlled by the IRS, applying federal tax laws and regulations.

If you are a self-employed home office warrior, your deduction is pretty easy to determine. You can deduct the portion of your home that you use regularly and exclusively: 1.) as your principal place of business, or 2.) to deal with clients and customers. If you use a separate structure exclusively and regularly, you can deduct expenses for it.

What does this mean? If you have a dedicated area in your home that you use only for work, you can might be able to deduct it. But you also have to meet the other part of the test. It either has to be the place where most of your business is done, or you have to physically meet clients there.

If you aren’t self-employed, there is one more hurdle you must jump to qualify for the home office deduction. Your working at home must be “for the convenience” of your employer. If you have a desk at your employer’s office, but you choose to work at home to save gas and commuting time, you don’t qualify for the deduction.

Finally, if you use a portion of your home for a daycare business or to store business inventory or product samples, there are special rules in play.

If you own a home business, you should be carefully in tune with your possible tax deductions. This can save you some serious money at tax time. And remember that April 1st isn’t the time to think about taxes. Plan for them during the year, and tax time won’t be stressful.

For more information about the home office deduction, check out Tax Tip 2008-53 or Publication 587 (PDF) - Business Use of Your Home (Figure A on page 4 is particularly helpful), both from the IRS.

This is a bi-weekly feature at Home Office Warrior. Now is your chance to send questions to an experienced attorney. Submit your questions to Andrew at andrew@homeofficewarrior.com or leave your comments here.

Disclaimer: Andrew Flusche is a licensed Virginia attorney, but these posts do not constitute legal advice, nor do they create an attorney client relationship. For legal advice, consult an attorney licensed in your jurisdiction.

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Ask Legal Andrew — What are corporate formalities?

Sep 08, 2008

Q:

What are corporate formalities?

A:

You may think that incorporating or forming an LLC automatically protects you from the liabilities of your home business. Not true.

For the law to recognize your business as a separate entity, it must behave like a business. You must follow what are referred to as “corporate formalities.”

At a minimum, this means that the company must make decisions properly, document those decisions, and protect the company’s assets.

Your business decisions must be made officially by the company itself. Even if you have a closely-held corporation, you should hold board meetings to make decisions. Your secretary should record the minutes of those meetings, and then the corporation (or LLC) can act accordingly.

Another key formality is that the corporation needs separate bank accounts and adequate financial statements. If you make the mistake of mixing personal and business assets, your business could be in serious legal trouble.

Failing to follow corporate formalities can result in your corporate shield being pierced. You could lose the limited liability that you incorporated to obtain. Run your business like a corporation, and it will be treated like one. Otherwise, the law might set aside your corporate form and allow creditors to come after you personally.

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Ask Legal Andrew — Do I need a Business License?

Sep 02, 2008

Q:

Do I need a business license?

A:

This answer depends upon your local government. (Lots of legal questions depend upon the specific laws in a particular place.) Smaller home based businesses might not need a business license, but your government could require one.

To illustrate this point, look at the business license requirements for two localities in which I practice. Spotsylvania County only requires a business license if you have annual gross receipts over $200,000. Most home businesses probably fall under that limit.

However, the City of Fredericksburg requires all businesses to have a license. If your gross receipts are under $50,000, you simply pay a $25 fee. But you still need a license.

It’s pretty simple to find out your business license requirements. Go to the website for the local government where your business is located. Look for the business section. You should quickly be able to find the license requirements. If they aren’t on the website, call the code compliance department. They should be able to help.

Note: If your home business has decent gross receipts, you might face some substantial fees when obtaining your business license. This is how many local governments tax businesses.

You typically don’t need a lawyer’s help to obtain your business license. But it might be quicker to contact a local business attorney, who will know exactly what you need to do. And then you’ll have one less thing to worry about.

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Ask Legal Andrew — Register your Business Name

Aug 23, 2008

Q:

Do I need to Register My Business Name?

A:

If you are not using your legal name (or a formally organized entity’s name), you probably need to register your business name with the government. This is typically referred to as an assumed, fictitious, or trade name.

Governments recognize that people and businesses have all sorts of reasons for adopting different names for business purposes. But governments also need to be able to identify businesses and figure out who exactly is responsible for different ventures. Thus, you can easily adopt a fictitious name by submitting an application and paying a small fee.

These requirements vary among states and local jurisdictions. However, the basic rule is simple: you can do business under your individual legal name OR the name of a legally organized business entity (corporation, LLC, etc). If you want to do business under any other name, you should contact a business attorney in your area to determine the legal requirements.

In Virginia, a fictitious name must be registered with the Clerk of the Circuit Court for every locality in which you do business. Most localities will process the fictitious name filing for around $10.

Practically speaking, the fictitious name requirements could be burdensome, if you do business in several localities. It would be a lot of paperwork to file names in every locality in a state. Thus, you might be better off formally changing your business name with the state.

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