Another tax deadline is fast approaching. Most traditionally employed hard-working folks have given up almost half of their hard-earned wages for taxes, and then they get to survive on what’s left. Taxes may be a source of stress and anxiety for many, but it shouldn’t be for home business owners. Home-based business owners now qualify for more tax deductions than any other category of taxpayer in America.
In any home business you have many, many more tax advantages than you would if you were simply working for someone else. Even if you decide to keep your current job and start a home business part-time, you’d still be able to deduct business expenses.
These advantages really snowball when you consider how you can improve the bottom line profit of your home business by declaring all of the deductions you’re entitled to. So let’s look at some of the deductions you can take with a small home business:
1. Home Office
If you’re concerned that claiming a home-office deduction is like waving a giant red-flag at a bull and taunting the IRS to audit you – don’t be. The key is that you must use the definition of “home office” the same way the Internal Revenue Service does. The IRS says it must be a space devoted to your business and absolutely nothing else, but the deduction isn’t limited to a full room. If your “office” occupies half of your guest bedroom, it’s still deductible.
Once you determine how large your workspace is, you can divide it by the square footage of your entire residence. That will give you the percentage to calculate how much of your home-related business expenses you can deduct (rent/mortgage, mortgage interest, insurance, etc). And don’t forget the bathroom! The IRS considers that an acceptable addition to the amount of space required for your home business use.
2. Utilities
A percentage of your electricity, natural gas, water, sewer – and even garbage removal can be deducted. Just be sure to follow the same percentage guidelines as you would to determine what portion of your rent/mortgage is deductible.
3. Tuition and Educational Materials
Any cost you incur for legitimate educational needs can be claimed. This includes books/training materials, college or vocational courses (both on campus and online) or any other expense related to educating yourself for your business. Did you learn a new language to help you communicate with more customers? That’s deductible, too.
4. Office Supplies
Any office supplies you purchase for your business are deductible. That also includes postage, stationery, business cards… even coffee and toilet paper. Be sure you keep your receipts – or some other type of accounting (like a spreadsheet) for these expenses if you’re using a credit card.
5. Furniture
Desks, filing cabinets, bookshelves, chairs – even artwork – it’s all deductible if you purchased them for legitimate business purposes. There are a couple of different ways you can go, when deducting expense for furniture. You can deduct the cost of the purchase in its entirety for the year of purchase, or you can deduct a portion of the expense each year for seven years.
6. Other Equipment
Computers, fax machines, printers, scanners, calculators, postage meters or any other business related equipment are also a valid tax deduction. Similar to the furniture, you can deduct all of it in one year, or depreciate it over a five year period. Don’t forget that cell phone, if you’re using it strictly for business!
7. Software and Subscriptions
A newer tax break now allows for you to deduct the cost of any computer software you purchase without having to depreciate the cost over a period of years. Add to this the cost of any subscriptions to industry-related magazines, newsletters or other publications – including subscriptions to databases for skip tracing information – which is all considered a legitimate business expense.
8. Advertising and Marketing Costs
Any costs you incur to market your business, including both print and Internet advertisements, website design and upkeep, and even purchased marketing leads are all deductable expenses.
9. Professional and Consulting Fees
That CPA you hired to help you figure out your taxes? That’s tax deductible, too. As well as attorney fees or any other professional or consulting fees for the business you may have incurred.
10. Mileage
With a judgment recovery business, it’s unlikely that you’ll rack up a lot of mileage for business-related travel, but it should still be noted that you can claim this expense as a deduction. But if you do, be sure you keep track of your information. Record the date, mileage, parking costs, tolls, as well as the purpose of the trip.
If you’re purchasing a vehicle for business purposes, you can include the depreciation of your vehicle as well as the interest on your loan. Lease payments are also deductible.
11. Travel, Entertainment, Gifts and Meals
If, for some reason, you must travel, 100% of your lodging, travel (auto, air or rail) is deductible, as are any costs associated with the travel, such as dry cleaning and rental cars, etc. However, be aware that only 50% of your meals are tax deductible. You can also include 50% of any meals with customers, if you’re discussing business-related matters. Any gifts purchased for customers, or an employee, is 100% deductible, but you’re only allowed to spend up to $25 each year per person.
12. Insurance Premiums
Any healthcare insurance you pay for yourself is completely deductible (so long as you weren’t eligible for other coverage – including any available through an employed spouse’s medical plan). If your spouse worked for you, you can deduct all the medical premiums paid for your spouse and your family, if they were listed as dependents.
13. Retirement Contributions
Saving up for a rainy day is actually encouraged by the IRS. If you’re contributing to a SEP-IRA or Keogh for your own retirement, it’s all completely deductible.
14. Social Security
The good, the bad and the… well, you know how it goes. I’m a glass half full kind of gal, so I’ll start with the good news, which is that you can deduct half of all social security contributions you’re required to pay for yourself for the year. The bad news: You must contribute a chunk of your net profits to social security… sometimes referred to as “self-employment tax.” But, hey, at least you can take half of it back.
15. Telephone Charges
Telephone costs are 100% deductible. The easiest way to keep track of this is to have a separate telephone line, dedicated specifically for business use. If you don’t, and you’re sharing a home landline or cell phone for personal and business use, you can still deduct any portion of business related expense. You’ll need to circle the business-related calls on your phone bills and keep track of the total.
16. Child Labor
This is a little-known deduction and shouldn’t be overlooked. I always hired my kids in the summer (they have to be 12 or older). It gave them some responsibility, and also gave me the perfect opportunity to inspire them and help to influence their work ethic. If your child is younger than 17, not only can you deduct what you pay them as a business expense – you won’t have to contribute social security tax for them, either. I should mention, though, that this does not apply if you operate as a corporation or LLC… You can only take advantage of the social security tax break for your kids if you’re operating as a sole proprietorship.
Isn’t all of this great news? This is just a short list of the many business deductions available to you when you operate a business from home.
Honestly, what was the one most important factor that made you look into starting a home based business? I feel pretty safe saying most likely it was to “make more money.” Maybe your motivation was to have more spare time, freedom… or to be able to spend more time with your family. No matter the reason, there is no doubt that the tax advantages alone make it worth the effort… and guess what? Professional membership dues and industry training materials are tax deductible!
Kind Regards,
Christina Smiley
