10 Basic Home Office Deductions for Your Business
More and more people are finding ways to start their own home-based business. The greatest benefit of working from home is the ability to save you taxes by deducting expenses when the new tax season rolls around.
People who start a home-based business often ask me what can they deduct for running a business from home. In this article, I will list the 10 Basic Home Office Deductions for Your Business to help prepare you for when you’re ready to file your taxes.
1. Home Office
The IRS says your home office must be a space devoted to your business and nothing else. Sorry, but deducting the den that houses the family computer and serves as a guest bedroom won’t fly with Uncle Sam. So be very careful in this deduction tip. Remember to measure your work area and divide by the square footage of your home. That percentage is the fraction of your home-related business expenses; for example, rent, mortgage, insurance, electricity, etc. that you can claim usually one fifth of each of its use.
If you drive for business, uncle Sam wants to give you some of your money back. Documentation is important, so keep a notebook in your vehicle to record the date, mileage, tolls, parking costs and the purpose of your business trip. Then at the end of the year, you can total the mileage and add in the tolls and parking to calculate your deduction.
3. Office supplies
If you don’t take the home office deduction, you can deduct the business supplies you buy. Hold on to those receipts, because these expenditures will offset your taxable business income. Plus, it’s always a good idea to keep receipts in case you need to refer back to something.
4. Office equipment
Your business items such as computers, copiers, fax machines and scanners are also tax deductible. You can take 100 percent up front or depreciate over five years. Again, keep all receipts when purchasing anything for your business.
5. Travel, entertainment, meals & gifts
If you’re a business traveler and you stay at a really nice hotel, then the entire cost is tax deductible. Also, the cost of travel for example air, rail or auto is 100 percent deductible, as are costs associated with life on the road like dry cleaning, and rental cars. Now the only exception is when you’re eating out. You can deduct only 50 percent of your meals while traveling so a good strategy to remember is to stay at the Ritz but eat at McDonald’s. 😉 Also, gifts to a client or an employee is 100 percent deductible.
6. Telephone charges
If you have a phone that you use for business and personal use, it’s best that you circle the business related calls that are tax deductible. Total them up and keep a copy. At the end of the year, tally your 12 bills and deduct 100 percent of your business related calls. However, if you have a second line installed and use it only for business, then it’s easier to track and all of these charges are tax deductible.
7. Child labor
There is no Social Security tax when you hire your child who is 17 or younger and you can deduct the salary as a business expense. I usually have my 16-year-old son help me with my book business so it’s nice having this break. However, this only works if you operate as a sole proprietor or as a partnership in which you and your spouse are the only partners. If your business runs as a corporation, then it, not you, are considered the employer and the corporation are not relieved of those tax liabilities. As an added bonus, children under the age of 17 don’t incur the Social Security tax, but they can still make contributions to a Roth IRA – so you can teach them work ethic and saving habits from the get-go.
8. Health insurance
Self-employed individuals (including sole proprietors) may be able to deduct the cost of health insurance for themselves and their family. However, you can’t deduct your insurance for any time when you’re able to participate in an employer-subsidized plan (i.e. through your spouse or partner).
9. Retirement fund
With a retirement fund, you’ll be able to ease your tax burden by adding to your retirement accounts; because both 401(k)’s and IRA’s are tax deferral until you start withdrawing from them, which you can do without penalty starting when you’re 59 ½ years old.
10. Make sound judgment
Remember, just because you have a home business doesn’t mean you can go crazy with deductions. If you don’t think you can face down an auditor with detailed proofs justifying the deduction, then perhaps it isn’t a deduction you should be taking. When you keep thorough records and know the penalties, then you should be on the right track.
Remember, get expert advice. The advice of an accountant should always be sought where applicable.
Can you add to the above 10 Basic Home Office Deductions for Your Business? Share your comments below.
About the author: Sonia Colon is writer/publisher of My Fashion E-Mall Blog & The Biz Buzz of A Latina Mom Blog. She is also owner at Books About Me. Sign up for the newsletter and never miss a powerful business marketing article plus receive a FREE eBook on ‘How to Rock Your Business with A Blog’.
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