Tired of the grind and want to set up your own home office? You’re not alone! Many people dream of the idea of having their own business or being self-employed. But with tax season approaching sooner than you think, it’s important for small business owners to know some of the tax basics before diving headfirst into their new entrepreneurial adventure.
Running a home-based business is hard work but can also be highly rewarding. However, make sure you know the ins and outs of filing your taxes. If you’re thinking about taking the plunge and starting your own home-based business, there are a few things you can do to prepare to set yourself up for success. From business startup costs to home office deduction rules, here are 10 home business tax tips to help you get there.
1. Understand What’s Deductible for Your Home Office
As a small business owner, it’s helpful to gain an understanding of what business expense is deductible for your home office. This can be a little tricky, especially because there are different rules for different types of small businesses. So, here’s the scoop:
First, you have to make sure that your home is both your primary place of business and where you actually do business. If it’s not, then you don’t get the tax deduction.
Next, if you’re self-employed, you can deduct the cost of any supplies that you use in your office—that includes furniture and equipment like computers or printers.
Finally, if you’re running a business out of your home and want to claim some business expenses as deductions, make sure that all those expenses are reasonable for what they do for your business. For example, if an expense is only used for personal reasons (like groceries), then it probably won’t be deductible. Keep reading to learn more valuable home business tax tips that can save you money.
2. Deduct Some of Your Home Utilities
Running a business from home means you’re probably spending a lot of time there. And that’s great! But when it comes to tax time, can you deduct some of your home utilities?
The answer is yes! The IRS allows small business owners to deduct certain expenses related to your home—which can include electricity, water, gas, and trash removal.
What’s more? You can also deduct the cost of heating and cooling your house. This includes both central air conditioning and heat as well as any additional costs for heat or air conditioning units in rooms where you work.
If you use your home computer for work, then you can also deduct the cost of internet access.
3. Expense Office Supplies
One of the most common tax deductions when working from home is office supplies. If you have to purchase things like pens, paperclips, or sticky notes, these business expenses are tax deductible.
The IRS allows you to deduct up to $1,600 in office supply expenses per year. The key is to keep detailed records of all purchases, including receipts and invoices. This helps ensure that you don’t overspend on supplies and can also help when it comes time to file your taxes.
Keep in mind that if you are using your computer for personal use as well as business-related tasks, then only the portion of your computer use related to work should be counted as a deduction.
4. Claim Home Office Upgrades
You might not know it, but this is one of the easiest ways to save money on your taxes—and it’s also one of the most worthwhile things you can do for your business.
Here is what we mean: if you are running a business from home and have made any upgrades to make your space more efficient or accommodating for work purposes—like installing new lighting or replacing old furniture—then these are all considered “improvements” by the IRS. These improvements can only be deducted once per year (so choose wisely), but they will usually cover around 10% of their cost. That means that if you spent $1,000 on new lighting fixtures, then $100 would be considered an improvement and could be deducted from your taxes!
5. Know the Rules of Health Insurance
If you’re self-employed, there are a lot of tax deductions you can take advantage of. One that’s often overlooked is the cost of health insurance for yourself and your employees. The IRS provides a list of what it considers excludable from income, including “medical care expenses for yourself, your spouse, and your dependents.”
This includes premiums for individual or family coverage, as well as any out-of-pocket costs such as copays and deductibles. If you are self-employed and have to pay for your own health insurance, this is something worth keeping in mind come tax time!
6. Take Advantage of Travel Expenses
With all the taxes you have to pay, why not get a little something back? If you travel for work and have to take a plane or bus to get there, make sure to claim your expenses as part of your business. You can either deduct the cost of transportation (gas, tolls) or the cost of lodging and meals while you are out on the road.
You also need to keep track of any parking fees as well as tolls paid during work-related trips. This includes tolls paid during a commute from home or paychecks spent on toll roads used for business travel.
The same goes for food expenses incurred while traveling for work purposes. These can be deducted as long as they exceed $50 per trip.
You can also deduct any business-related expenses that happen while you are away, like buying supplies or paying for a conference. As long as it’s related to your work and not personal use—and as long as it is not too extravagant (you will want to keep receipts in case someone challenges your deductions)—it’s fair game.
7. Keep Track of Business Mileage
Business owners who run their companies from home are often surprised by how much mileage they rack up on their vehicles. So, it’s important to keep track of your business mileage. This can help you save money on taxes and ensure that you are getting the most out of your deductions.
As a small business owner, you are likely to have to keep track of your business mileage. If you are not sure how to do that, here are some tips for tracking business mileage in the right way.
- Keep a log of all your miles, including the date and purpose for each trip, as well as your total mileage for the year.
- Make sure to keep receipts for any car maintenance that occurs during this time. It is also important to keep in mind that you can only claim mileage for one vehicle at a time (so if you use both a personal and work-related vehicle, you should only claim the miles from one).
- Use a mileage reimbursement calculator to determine how much you should deduct from your taxable income, based on your state’s rules for miles driven for work purposes.
- You may also be able to deduct parking fees or tolls incurred while on business travel—but only if they were specifically incurred while traveling for work or performing work tasks during this time period. Otherwise, these expenses will not qualify as a deductible business expense.
The IRS requires that you keep track of all your business mileage and deduct it from your income to claim a deduction. You should keep an accurate record of everything you drive for work purposes, including miles driven and the purpose of each trip.
8. Expense Lunch Dates
Lunch dates are a great way to build relationships with clients, but they can also be expensive! This enjoyable home business tax tip can be a win-win; eat a delicious meal while learning more about your client. If you’re a small business owner who works from home and need to meet with clients or prospects in person, it’s important to be able to write off the cost of those lunches. Here’s how:
- Make sure the lunch is work-related by having a business conversation at some point during the meal. It doesn’t have to be an entire meeting; just make sure you have at least some sort of discussion about your business while you’re eating together.
- Write down what was discussed and what was eaten—it’s okay if you forget a few details later on, but if you can remember as much as possible now, it will make tax time easier later on!
- Keep track of any other expenses related to the meeting—like cab fare, parking fees, or if you used public transportation. These are all things that can be written off as well!
When you work from home, it can be easy to get stuck in a rut. You might feel like you never leave the house because your office is always there with you—and sometimes, it feels like all you do is work! But don’t let that stop you from making time for yourself and your clients.
9. Consider a Tax-Deferred Retirement Plan
One of the easiest ways to reduce your tax liability is with a tax-deferred retirement plan. This means that you are not paying income taxes on the money you put into your retirement account. The money can grow over time and be withdrawn without having to pay income taxes until you retire.
There are two main types of tax-deferred retirement plans: Individual Retirement Accounts (IRAs) and 401(k)s.
1. SEP IRA
One of the quickest and easiest ways to start saving for retirement is with a SEP IRA (Simplified Employee Pension Individual Retirement Arrangement). With a SEP IRA, you contribute a set percentage of your income into an account specifically set up for this purpose. The money in your account grows without being taxed until it is withdrawn later on in life.
2. 401(k) Plan or 403(b) Plan
If you have employees who work for you, consider setting up a 401(k) or 403(b) plan so that they can save some money for their own retirements as well. You may also be able to get some tax breaks from your contributions to these plans—check with your accountant!
If you are self-employed, you’re probably at least thinking about what kind of retirement plan to set up for yourself. If you haven’t already started one, now is the time! You can take advantage of tax-deferred savings options that will help you build your nest egg.
10. Know How Business Structure Affects Taxes
As a business owner, you probably know that how your business is set up can affect how much you pay in taxes. These are important things to know!
If you have a sole proprietorship or partnership, for example, you may be responsible for paying self-employment taxes on your income and expenses. These taxes are intended to cover Social Security and Medicare—the same benefits that an employer would pay for its employees. However, if you have an S-Corporation or an LLC, these taxes won’t apply to you.
So how do you know which type of business structure is best for you? It depends on what type of work you do and how much time it takes up in your life! If running a business is more than just a hobby and it is something that takes up more than just a few hours here and there, then consider forming an LLC or S-Corporation so that your earnings are taxed at corporate rates rather than as personal income.
One of the most crucial factors of any business is knowing how to get your taxes right. While taxes are always an important consideration for business owners, it can be a difficult process for self-employed individuals who operate their businesses from home. Staying current with business expenses that you can write off can decrease your annual tax expense.
Hopefully, these 10 home business tax tips will help get you started on the right foot when you run a home-based business so that you can have a better understanding of what it takes to set yourself up financially in preparation for tax season. For more helpful information, check out these other guides on finances, taxes, and all things entrepreneurial!