The Tax Advantages of Operating Your Own Business

What are the Tax Benefits of Starting a Home-Based Business?

 Your home based business is no doubt fulfilling to you personally. But did you know that there are tax benefits from a home-based business as well?

Write It Off

Do you need beads, clasps and wire for your jewelry business? Fabric and patterns for your dress-making business? Paper, envelopes and business cards for almost any enterprise? These are all business expenses which can be written off on IRS schedule C, the form filed by most home-based businesses.

An additional deduction can be taken for mileage driven for business purposes (check with the IRS for the current rate per mile). Combine other errands with your business, and the mileage is still deductible.

Speaking of mileage, travel is deductible as well if it aligns with your home based business. For instance, if you travel to attend a conference relating to your business, your expenses are deductible. You can take your spouse and/or family along; while you can only deduct your individual expenses, you will still save if they share your hotel room and vehicle.

Home Office

The home office is probably the most appealing tax benefit of a home-based business. To benefit from this deduction, you will need to allocate a portion of your home (a room or even an area within a room) solely to your business. Then, calculate the square footage of that area and determine the percentage of your home that makes up the home office.

Your home office may constitute 5% of your home. Now the fun begins. You can deduct 5% of many household expenses as business expenses. Examples include, but are not limited to:

  • mortgage interest or rent
  • utilities including gas, electric, water and sewer
  • phone and internet service
  • property taxes and insurance on your house

 

You may be able to think of more deductions for your home office. To keep things legal, the IRS states that the business part of your home must be “exclusive, regular, for your trade or business, and your principal place of business.” In other words, your home office space must only be used for your home-based business, and it should be regularly used for that purpose. It should also be your primary location for doing business.

IRS publication 334, Tax Guide for Small Business, will be an invaluable tool in helping you know all the details you will need to accurately fill out the Schedule C return for your home-based business.

Hire the Family

Hire your spouse or children part-time as an additional business expense deduction. Your teen may enjoy a part-time job assembling bags of cookies or helping fill orders from your website. A great source for junior’s earnings would be an IRA or other savings vehicle. Document your child’s working hours, and pay a reasonable wage to avoid appearing suspicious to the IRS.

Keep Good Records

Good records are key in successfully claiming all the home-based business deductions to which you are entitled. Verify everything with copies of bills, pay stubs, a mileage log for the vehicle, etc. If you are ever audited, you will have your information organized and ready.

With planning and organization, the tax benefits of a home-based business are great!

_______________________________

Susan Braun is a freelance writer living with her husband, three daughters, 2 rabbits, 2 gerbils and hedgehog in Indiana.  She writes at girlsinwhitedresses.wordpress.com and Associated Content.

 

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