Similarities in household and business expenses are especially important to small, home-based business operators who need to decide what expenses to allocate to business deductions. The need to manage a budget is the starting point for comparing similar expenses shared by households and businesses. Households and businesses most often must track spending to learn to better manage money and make wise spending choices, according to the CNN Money feature "Money 11 Lesson 2: Making a Budget."
In her overview of "Business Expenses,” Vicki B. Sarazin, CPA, suggests that "Direct Expenses" are among the three basic types of business expenses. These include car expenses, advertising, employee wages, legal expenses, laundry and cleaning, supplies and many more direct costs to operating a business. Obviously, several of these expenses, including car, legal and laundry are common household expenditures. Sarazin explains a method of "Time-Space" to determine how much of shared expenses to allocate toward your business and how much should be considered household expenses. Ultimately, the question is what portion of these items is most used in the business. The IRS includes "personal expenses" among expenses that you must keep separate if you are claiming business tax deductions. The easiest approach is to get separate receipts for business and personal items as much as possible.
Sarazin describes the second category of business expenses as "House Expenses.” These are expenses tied directly to upkeep and maintenance of the home. Casualty losses, mortgage loan interest, real estate taxes, house insurance, house repairs and maintenance, utilities, and house rent are among common house expenses that Sarazin notes may serve as business deductions. Improvements to your home may serve as business deductions if they serve a business purpose, according to the IRS. Sarazin notes that the "Time-Space" or "budget-percentage" methods to correctly allocate house expenses to your business are important here. Small, home-based business owners commonly deduct portions of office space, utilities and the like based on space and time used in business operation within the home.
Sarazin describes capital expenses as investments of more than $100 to repair or improve your property and its value. "Capital Expenses" are specifically designated by the IRS as common deductions for businesses. Personal property, home, major improvements, land improvements and auto expenses are among common capital household expenses that offer business deductions. Again, Sarazin notes the importance of the space-time allocation for business deductions. Capital expenses offer good investment opportunities for homeowners that not only increase their equity and value of their property, but also benefit from a reduced tax obligation.