Whether you’re side hustling or have a small business, it’s important to know the tax advantages of having a home business. Many people have side businesses that operate out of their home offering web design, bookkeeping, programmer and writing services. Some also base the operations of their cleaning, dog walking, and catering services out of their home.
In these instances, it’s important to know the tax implications and advantages of having a home-based business. With any business, you’ll have to deal with a different set of tax laws. It may be confusing but there are resources available for the sole proprietor. The first step is to understand the basics then do a deep dive and consult a tax professional and accountant for all the nitty details that’s applicable to your situation.
For now, the following are several beneficial deductions you might not be aware of and apply to your home-based business.
Your Home Office
In order for you to take advantage of a home office deduction, you have to actually have a home office. Setting up your laptop on the kitchen table doesn’t count. You must have a dedicated space that is all about the business. It can be in the corner of a room, but it must be specifically used for business purposes. The amount you’ll get to deduct will depend on the square footage of that space. That could translate into a deduction from the amount of rent you pay or your mortgage loans.
Your Home Utilities
It stands to reason that if your home office is a legitimate deduction, so are your home utilities. However, it’s only a portion of those utility bills such as electricity, heating and the Internet that can be considered business expenses. Think about these deductions you would take if you were renting out a commercial office space.
Your Office Supplies
Did you buy a new laptop this year? What about a printer? Then there are the toner cartridges, the paper, stamps, envelopes and any other items you buy for your office. These are business expenses that can be deducted. Although, these office supplies might not add up to a lot every little bit helps when you’re calculating potential tax deductions.
Your Travel Expenses
Did your home business require you to travel to a trade show or expo? Did you need to go to another city to meet a potential/current client? Those travel expenses can be deducted. As an added bonus, if you set up an out-of-town meeting on a Friday and a Monday, you get to deduct your hotel and food costs for the weekend. The key is to keep detailed accounts of your travels along with receipts.
Your Auto Expenses
Suppose you work at home and are in need of a jolt of java from Starbucks. Can you deduct the cost of driving to get your caffeine? No. However, if you leave your home to conduct business such as a client lunch or meeting, then you can tap into the standard mileage deduction used by a business. Those deductions also cover parking fees, tolls or public transportation costs. Use your car often? You’ll want to use a system or app to keep yourself organized.
Your Retirement Plan
Just because you’re working from home doesn’t mean you still shouldn’t contribute towards your retirement. A tax-deferred retirement account can help you with lowering your tax liability. For example, the money you put in won’t be taxed. The benefit of contributing to a tax-deferred retirement plan is two-fold. You get to take it off your taxes and have it for later in life.
Setting up your home business means keeping track of all your expenses. The daily/weekly stack of receipts is a habit you should get into. Or using an expense tracker app can make it a simpler process. Find a small business app in the financial marketplace.
Interested in learning more about deductions, speak to an accountant who specializes in home businesses. They’ll be up-to-date on tax law and recent changes so you can maximize your returns. And you can still prepare your taxes using online tax preparation software. Many help sole proprietors and self-employed file their personal and business taxes.