Keyword: Home Based Business

This is archived information that pertains only to the 2005 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

I purchased a computer last year to do online day trading part-time from home for additional income. Can I deduct or depreciate the cost of the computer or internet connection from my investment income?

You may deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Form 1040, Schedule A (PDF), line 22, Itemized Deductions. This would include depreciation on the portion of your computer used for investment purposes, and the portion of your internet access charges used for investment purposes.

The entire acquisition cost of a computer purchased for business use can be expensed under Code section 179 in the first year if qualified, or depreciated over a 5-year recovery period. Under section 179, you can elect to recover all or part of the cost of certain qualifying property, up to a dollar limit, by deducting it in the year you place the property in service. You can elect to expense the cost of qualifying property instead of recovering the cost by taking depreciation. To claim the expense in the first year, the property must be used more than 50% for business use (as opposed to investment use), and meet the other requirements for expensing. One of those requirements is that the total cost of qualifying property you can deduct after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Any cost not deductible in one year under section 179 because of the business income limit can be carried to the next year.

The 2003 Jobs and Growth Act raised the aggregate cost that can be expensed for any tax year beginning after 2002 and before 2006 to $100,000. The new law also expanded the definition of Code Section 179 property to include off-the-shelf computer software. See Code Section 179 for the expanded definition. If the business use falls to 50% or less in a later year, these tax benefits may be subject to recapture. See Publication 946 , How to Depreciate Property for additional information on the section 179 deduction.

Because these deductions are for investment expenses rather than for business expenses, these deductions must be reduced by 2% of your adjusted gross income. Use Form 4562 (PDF), Depreciation and Amortization, to compute the depreciation for the portion of your computer used for investment purposes.

Note: Unless the computer is used more than 50% for business purpose (as opposed to investment purposes), you cannot claim section 179 expensing of the computer or claim accelerated depreciation (including the special depreciation) for it. For more information, refer to "Listed Property" in Publication 946, How to Depreciate Property.

I have a home office. Can I deduct expenses like mortgage, utilities, etc., but not deduct depreciation so that when I sell this house, the basis won't be affected?

If you qualify to deduct expenses for the business use of your home, you can claim depreciation for the part of your home that is a home office. Generally, the part of your home that is a home office is depreciated over a recovery period of 39 years using the straight line method of depreciation and a mid-month convention. If you do not claim depreciation on that part of your home that is a home office, you are still required to reduce the basis of your home for the allowable depreciation of that part of your home that is a home office when reporting the sale of your home. For more information, refer to Publication 587, Business Use of Your Home.

Does a small company need a tax ID number?

A sole proprietor who does not have any employees and who does not file any excise or pension plan tax returns is the only business person who does not need an employer identification number. In this instance, the sole proprietor uses his or her social security number as the taxpayer identification number.

Under what circumstances am I required to change my employer identification number (EIN)?

If you already have an EIN, and the organization or ownership of your business changes, you may need to apply for a new number. Some of the circumstances under which a new number is required are as follows:

An existing business is purchased or inherited by an individual who will operate it as a sole proprietorship
A sole proprietorship changes to a corporation or a partnership,
A partnership changes to a corporation or a sole proprietorship,
A corporation changes to a partnership or a sole proprietorship, or
An individual owner dies, and the estate takes over the business.

This list is not all inclusive. Please refer to the website www.irs.gov under Business, then Employer ID Numbers.

Do businesses have to obtain the taxpayer identification number (TIN) from vendors and keep it somewhere on file?

In general, businesses are required to obtain the TIN from vendors if they are required to file any return, document or other statement that calls for the taxpayer identification numbers (TINs) of other taxpayers. Form W-9 (PDF), Request for Taxpayer Identification Number and Certification, can be used to make the request. The business should also maintain the verification of these numbers in their records.

How do you distinguish between a business and a hobby?

Since hobby expenses are deductible only to the extent of hobby income, it is important to distinguish hobby expenses from expenses incurred in an activity engaged in for profit. In making this distinction, all facts and circumstances with respect to the activity are taken into account and no one factor is determinative. Among the factors which should normally be taken into account are the following:

Whether you carry on the activity in a businesslike manner
Whether the time and effort you put into the activity indicate you intend to make it profitable
Whether you depend on income from the activity for your livelihood
Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business)
Whether you change your methods of operation in an attempt to improve profitability
Whether you, or your advisors, have the knowledge needed to carry on the activity as a successful business
Whether you were successful in making a profit in similar activities in the past
Whether the activity makes a profit in some years, and how much profit it makes
Whether you can expect to make a future profit from the appreciation of the assets used in the activity

Additional information on this topic is available in section 1.183-2 (b) of the federal tax regulations.

I use my home for business. Can I deduct the expenses?

To deduct expenses related to the business use of part of your home, you must meet specific requirements. Even then, your deduction may be limited.

Your use of the business part of your home must be:

Exclusive (see *exceptions below),
Regular,
For your trade or business, AND

The business part of your home must be one of the following:

Your principal place of business,
A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or
A separate structure (not attached to your home) you use in connection with your trade or business.

Additional tests for employee use. If you are an employee and you use a part of your home for business, you may qualify for a deduction. You must meet the tests discussed above plus:

Your business use must be for the convenience of your employer, and
You do not rent any part of your home to your employer and use the rented portion to perform services as an employee.

Whether the business use of your home is for your employer's convenience depends on all the facts and circumstances. However, business use is not considered to be for your employer's convenience merely because it is appropriate and helpful.

*exceptions

You do not have to meet the exclusive use test if you satisfy the rules that apply in either of the following circumstances.

You use part of your home for the storage of inventory or product samples.
You use part of your home as a day-care facility.

Form 1040, Schedule C (PDF) filers calculate the business use of home expenses and limits on Form 8829 (PDF) . The deduction is claimed on line 30 of Schedule C. Employees claim deduction for business use of home as an itemized deduction on Form 1040, Schedule A (PDF) .

For more information refer to Tax Topic 509 , Business Use of Home, or Publication 587 , Business Use of Your Home (Including Use by Day-Care Providers).

I am starting a small business. What assistance can IRS give me?

If you are starting or already have a small business and need information on taxes, recordkeeping, accounting practices, completing Federal business and employment tax returns, and meeting other Federal tax obligations, there is help available. Much of the assistance is free. The service is called Small Business Tax Education Program, or STEP. Go to Around the Nation for seminars in your area or check out Tax Info For Business on the IRS web site. You can find out more about this program for small business by referring to Publication 334, Tax Guide for Small Business, or Tax Topic 103, Small Business Tax Education Program (STEP).

How do I find out about whether or not my business needs to collect sales tax?

Your question is a state tax question. Your state revenue department should provide information regarding sales tax to you. To access the state you need to direct your question to, please go to our Alphabetical State Index.

I just started a small business and want to know if I have to file my income taxes quarterly or at the end of the year?

The Federal Income Tax return is filed annually. As a self-employed individual, if after deducting withholding and credits you expect to owe more than the amount allowed by law at the end of the year, you should make estimated tax payments on a quarterly basis.Form 1040-ES (PDF), Estimated Tax for Individuals, will assist you in determining if estimated tax payments are due and how they are paid.

When you file the income tax return at the end of the year, you include the income from the business on the return. The forms to be filed are Form 1040 (PDF), U.S. Individual Income Tax Return, Form 1040, Schedule C (PDF), Profit or Loss from Business Form 1040, Schedule SE (PDF), Self-Employment Tax. If estimated tax payments where made during the year, they will be claimed on the individual income tax return as payments. See Form 1040, Line 57.

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