In the internet age, you can easily operate your business from home, whether it be as a freelance app designer or financial consultant, and many do – about 53% of all small businesses are home based. However, only a small amount of those business owners claim the many tax deductions available. Below are tips on how to maximize your deductions and contribute to the success of your at-home money mill.
As a business owner, you probably know that claiming deductions can be nitty gritty. That’s why like your personal taxes, and perhaps more so, it is crucial to stay organize and keep records. Deductions outlined below, such as business lunches and travel, can get lost in your bank statements, or be mistaken for personal expenses. Put a system in place, write everything down, and keep a digital copy of everything, especially if Uncle Sam comes knocking with questions.
One of the widely known and oft-deducted expenses is that of the home office. In 2014, the IRS made this simple by allowing business owners to claim $5 per square foot, up to 300 sq ft. However, many home business owners stop there or shortly after. Some things just don’t occur to you as business qualified. Think of all the paper, toner, postage, and other office do-dads that you purchase over the year. These are all fully deductible. Also, electronics or tech equipment, like a laptop or DSLR, are also deductible, as long as it clearly serves your business.
If, by chance, you also use your tablet to take pictures and surf the internet while traveling, you can only deduct the percentage of corresponding time that you dedicate it to money making. Speaking of travel, if you do so for work, you can deduct transportation, lodging, 50% of your meals, and more. Expenses pertaining to traveling to meet a client, purchasing business supplies, conducting research, etc. also count. Don’t forget jazzing up the office, especially if you bring clients in. Necessary and useful furniture, like a desk and lamp, are certainly deductible, but that Monet isn’t, so don’t go too wild.
Lastly, if you don’t participate in your spouse’s or partner’s employer-subsidized insurance, you’re not eligible, but all others can deduct the cost of health insurance for themselves and their family.
Now on to structuring your business to put yourself in the best financial situation. Passing money along to a tax-deferred retirement plan is one of the best ways to lower your taxes. Even if you contribute the bare minimum, set one up. As a business owner and sole proprietor, you know full well self-employment taxes are a reality. If you form a corporation or an LLC, you might reduce these taxes, because you can pay yourself a ‘reasonable salary,’ as defined by the IRS, and any remaining profits are taken as profit distribution (not subject to self-employment taxes).
Have a headache over next year’s taxes already? Owning a home-based business means taking care to separate your personal and business finances, recording your expenses very closely, and keeping your accurate records in a safe place. The tax code changes every year, so keep up to date on expansions and restrictions for possible deductions. Luckily, the IRS is pushing to simplify the tax process for home business owners. Hopefully, that will include the option to claim a standard deduction, like individual taxpayers do. In the meantime, get your spreadsheets ready!
Sign up for our newsletter and be the first to find out when exciting IRS news happens. Yes, exciting. We're really into taxes.