The 5 Tax Deductions Home-Based Businesses Can Claim

The 5 Tax Deductions Home-Based Businesses Can ClaimBy Deborah Sweeney

According to the Global Entrepreneurship Monitor, nearly 2/3rds of all businesses are started in someone’s home and, interestingly, 59% of the 3+ year-old businesses surveyed continue to operate out of the owner’s house. Operating out of your home, though logistically challenging, can save you a lot of money, so it makes sense that even the more established business owners choose to work out of their house.

However, this practice also blurs the line separating our personal and work lives and when tax season rolls around, it’s easy to get confused as to what, exactly, you’re allowed to deduct as a business expense. Does using work equipment, like a computer or iPad, outside of work disqualify it from deduction? In order to be deductible, a business expense has to be both ordinary and necessary – that means it has to be commonly found and appropriate for your business. Home-based businesses heads up – here are five common deductions you’re able to claim.

New Computers, Office Equipment, and Off-the-Shelf Software:

Section 179 of the IRS tax code allows businesses to deduct certain types of property as a business expense. While determining what property qualifies can get confusing, the only applicable property for most home-based businesses is office equipment, computers, and software. So if you buy a new desk or a new computer for your business, you can claim a 179 deduction for the year you put it into use. However, you can only take a partial deduction if you occasionally use qualifying property for personal reasons. For example, if you bought a $1,000 computer, and you only use it as a business computer 80% of the time, you can only claim $800 for your Section 179 Deduction.

Other Tax Payments:

While you cannot claim federal income tax as a deduction, you can claim state and local income taxes. Since you are self-employed, you can also take advantage of the self-employment tax deduction as you have to pay both the employee’s and the employer’s contributions to Medicare and Social Security. Since you’re paying double here, the IRS allows you to deduct 50% of what you paid in self-employment tax.

Expenses of Going into Business:

Starting a business requires funding, so the IRS allows new businesses to treat the costs of starting a business as a capital expense. Whatever you paid for advertising, travel, or surveying is treated as a startup cost, and the IRS allows up to a $5,000 deduction for startup costs. However, keep in the mind that once your business is up and running, anything you buy for the company is a business expense.

Legal and Professional Fees:

If you have an accountant or a lawyer and use them for your business, you can deduct their fees from your Schedule C. But, like all business deductions, whatever fees are claimed have to be for services that were ordinary and necessary for operating your business. If you hired an attorney to help you make a will, or went to an accountant for tax advice, you can’t deduct those fees. However, as a sole proprietor, you can deduct any fees paid to prepare your business’s taxes.

Your Office:

A few years ago, you actually had to play arithmetic gymnastics if you wanted to claim a home office – the IRS even had a worksheet for figuring out this one deduction! Thankfully, as of January 1st 2013, the IRS began offering a much simpler option. You are allowed to deduct $5 per square foot of your office, up to 300 square feet. If your office is any bigger than that, you can just claim a flat $1,500. You’re also allowed to deduct whatever percentage of your utilities your home office uses – normally this percentage is equal to the percentage of your home used for the business.

When you run a home-based business, filing your tax returns can get really complicated. The best course of action is to clearly separate what you use for your business from what you use in your personal life. Use whatever goods or services you buy for your business solely for your business – while this may seem inconvenient, trust me when I say it will simplify your life immensely.

Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @mycorporation.

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