One of the major benefits to having a home based business is for the tax advantages. Once you’ve made a commitment to start or grow your company from your living quarters, even if only for the short term, you’ll be happy to learn that a home business will give you tax advantages you wouldn’t enjoy otherwise. Tax deductions work by lowering your taxable income, hence saving you money on your taxes. Here is some advice about home business tax write-offs, and about other things you should do to help maximize the tax benefits of your situation while running your company from home.
This is a major decisions when it comes to home business write-offs. Even tax experts don’t agree on whether you should put in for it. The home office deduction is for depreciation and operating costs of maintaining an office, workshop or other business site in your home. One way to calculate the deduction is to measure the square footage of your dedicated office space and divide it by the home’s total livable space. You can typically deduct not only the business’s share of depreciation but also a share of your home’s overall utility costs.
You may be able to maximize this deduction by figuring out what your utility bill would be if you didn’t work at home, rather than simply deducting the percentage of utility expenses to match the percentage of physical space occupied by the office. The former deduction will usually be a lot higher, because you might not be running the furnace at all, for example, if you worked outside your home.
One thing you’ve got to be absolutely certain of is that the space is solely dedicated to your business, or else you will not qualify for the deduction. Even if you’ve just got a closet where you stuff your winter clothes, and it’s in the office that you’re wanting to deduct, you can’t do it. The IRS is very specific that the space you write off must be exclusively for business use.
You might be surprised how much of your every day expenditures can be deductible as legitimate business expenses, especially when you're just getting started setting up your company and shelling out hundreds or even thousands of dollars to outfit things. You will tend to underestimate what you spend in cash. Make sure you keep accurate records of what you spend on outfitting your business.
On the other hand, a big mistake for home business owners is trying to deduct an entire expense as if it is attributable only to the business, when that just isn’t the case. For example, you may use your PC 12 hours a day for your company; but if your kids also use it in the evening to play video games, you should keep a log to detail the different uses, and you can only deduct the percentage of time that you’re using the equipment for business purposes.
One way that IRS rules favor a home-based business is that you can deduct the expense of the first mile that you drive away from your house every day, while people who aren’t self-employed cannot deduct their commuting expenses. So take advantage of this provision by planning a business component into each trip, even if you’re going to run some personal errands along the way. For example, if you have a post office box, try and fit as many stops along the way when you go to pick up your mail every day.
A home-based business offers plenty of lifestyle advantages, but it also benefits from some great tax write-off possibilities. Take the time to learn more about them and maximize your home-based business’s financial success. Sign up below for a free tax strategy session with a trained tax professional. This consultation will help you identify the tax write offs that apply to your unique situation and can save you thousands of dollars every year.
To learn more tax saving strategies, please see our Tax Write Offs page.