Depreciation, amortization and home-based businesses
February 29, 2012
Despite many people's misconceptions, every home-based business - even a small side job that isn't particularly profitable - must file a tax return.
Depending on the particulars of an enterprise, the business owner may qualify for several different deductions. Those that use a portion of their homes for the business may qualify for the home office deduction, whether it's used as a principal place of business or to meet with clients. Form 8829 should be filed to report the business percentage of expenses such as property taxes, mortgage interest, utilities and insurance.
Similarly, small business owners can claim deductions for depreciation
and amortization using Form 4562.
Hobby income is less clear-cut, as the Internal Revenue Service considers it to be taxable income unless the venture has been consistently profitable over several years. After three years in the black, the hobby is categorized as a business and any income must be reported as self-employment income.
For the purposes of filing small business taxes, amortization pertains to spreading a fixed asset
's cost over its useful life, while depreciation refers to prorating the cost over the asset's projected life span.