The following list contains some of the most common deductions home-based business owners claim on their tax return.
It is very important to consult with an accountant or financial professional to determine whether you are eligible for any of these deductions, as well as any others that exist outside this list.
Also, the Interactive Tax Assistant (ITA) from the IRS is a tool that provides answers to a number of tax law questions. It can determine if a type of income is taxable, if you’re eligible to claim certain credits, and if you can deduct expenses on your tax return. It also provides answers for general questions, including determining your filing status, if you can claim dependents, if you have to file a tax return, etc.
Home office-related deductions are based on the percentage of your home that you use for business. To obtain this number, divide the square footage of your office space by the total square footage of your home. It is important that these calculations are accurate and that you only deduct the appropriate percentage of each expense.
For example, if you have a house with 8 rooms and use one room as an office, your business use percentage will be 1/8 or 12.5 percent. Alternately, if your home office was 168 square feet and your home was a total of 2000 square feet, your business use percentage will be 168/2000 or 8.4 percent.
If you do meet IRS guidelines, you can deduct your homeowner’s insurance, association fees, cleaning services and supplies that are used in your business space, mortgage insurance and interest, as well as a portion of your utilities including electricity, internet, heat and ofcurse your phone.
Publication 587 has detailed information on rules for the business use of your home, including how to determine whether your home office qualifies as your principal place of business.
Repairs and Maintenance
If you make home repairs or upgrades related directly to your business space, you may also write these expenses off on your taxes. The amount you can write off depends on whether the expense is Direct or Indirect.
A Direct expense means that it only benefits your home office. For example, if you spend $100 to fix a window in your home office, you may deduct the full $100 on your taxes.
An Indirect expense offers a benefit to your entire home. For example, if you pay $1,000 to repair a leak in your roof, you may only deduct a percentage of that expense equivalent to the percentage of your home used for business.
You may also be able to deduct expenses for long-term improvements to your home, like a full roof replacement or room renovation, but these must be depreciated over time. Repairs, on the other hand, can be wholly deducted in a single tax year.
The self-employment tax refers to the employer portion of Medicare and Social Security taxes that self-employed people must pay. Everyone who works must pay these taxes, which for 2019 are 7.65% for employees and 15.30% for the self-employed.
Here’s how the rates break down:
6.2% Social Security tax each for employee and employer on the first $132,900 in wages ($137,700 for 2020).
1.45% Medicare tax each for employee and employer with no wage limit
The income thresholds for additional Medicare tax apply not just to self-employment income, but to your combined wages, compensation, and self-employment income. So if you have $100,000 in self-employment income and your spouse has $160,000 in wage income, you’ll have to pay the additional Medicare tax of 0.9% on the $10,000 by which your joint income exceeds the $250,000 threshold.
Self-employment tax will cost you less than you might think because you get to deduct half of your self-employment tax from your net income. The IRS treats the “employer” portion of the self-employment tax as a business expense and allows you to deduct it accordingly. You only pay self-employment tax on 92.35% of your net, not gross, business income.
One deduction you can take going into business for yourself that is especially worthwhile: the deduction for self-employed retirement plan contributions. Contributions to SEP-IRAs, SIMPLE IRAs, and solo 401(k)s reduce your tax bill now and help you rack up tax-deferred investment gains for later.
Contribution limits vary by plan type and the IRS adjusts the maximums annually. Of course, you can’t contribute more than you earn, and this benefit will only help you if you have enough profits to take advantage of it.
Once you’ve decided to open one of these accounts, you’ll have to decide where to do it. Most online brokers will allow you to open the four most common account types: IRA, solo 401(k), SEP IRA and SIMPLE IRA. Each broker will walk you through the process of opening one of these accounts and explain any paperwork you may need to file with the IRS. But to be on the safe side, you may also want to work with an accountant.
Health Insurance Premiums
If you are self-employed, pay for your own health insurance premiums and were not eligible to participate in a plan through your spouse’s employer, you can deduct all of your health, dental and qualified long-term care insurance premiums.
You can also deduct premiums that you paid to provide coverage for your spouse, your dependents and your children who were younger than 27 at year-end, even if they aren’t dependents.
Your Vehicle Use
When you use your car for business, your expenses for those drives are tax-deductible. Make sure to keep excellent records of the date, mileage, and purpose for each trip and don’t try to claim personal car trips as business car trips.
The standard mileage rate ( 57.5 cents in 2020) is the easiest because it requires minimal record-keeping and calculation. Just write down the business miles you drive and the dates you drive them. Then, multiply your total annual business miles by the standard mileage rate. This amount is your deductible expense.
To use the actual expense method, you must calculate the percentage of driving you did for business all year as well as the total cost of operating your car, including gas, oil changes, registration fees, repairs, and car insurance. It may be worth calculating the deduction both ways so you can claim the larger amount.
Using an app like TrackMyDrive can help you keep track of those miles. is TrackMy Drive runs seamlessly in the background on your mobile device, automatically tracking every time you go for a drive. From there it’s simple to categorize every trip as business or personal
To qualify as a tax deduction, business travel must last longer than an ordinary workday, require you to get sleep or rest and take place away from your tax home.
To be considered a business trip, you should have a specific business purpose planned before you leave home and you must actually engage in business activity, like finding new customers, meeting with clients or learning new skills directly related to your business, while you are on the road.
Keep complete and accurate records and receipts for your business travel expenses and activities, as this deduction often draws scrutiny from the IRS.
Your travel expenses for business are 100% deductible, except for meals, which are limited to 50%. Deductible travel expenses include the cost of transportation to and from your destination (like plane fare), the cost of transportation at your destination (car rental, Uber fare or subway tickets), lodging and meals.
Any education expenses you want to deduct must be related to maintaining or improving your skills for your existing business. For example, if you have yet to expand your business online because you feel like you do not know how or where to start, you can invest in a program like Online Expert Empire to brush up on your online sales, marketing, social media, and business skills and knowledge.
Maximize the Health of Your Home-Based Business
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