These days, almost anyone can start a home business. The opportunities are there, and many of them do not cost a bundle to get started. The IRS is even favorable to home-business owners—and the self-employed—enabling you access to a wide range of tax deductions.
Many tax deductions for a home-based business are available. The IRS allows you to deduct nearly any expense—as long as it is directly connected to your business and the goal is to make a profit.
Your business does not even need to be registered with the IRS to claim home-business tax deductions. You can claim sole proprietorship, which means you are the owner and you are actively engaged in the business. Or, you can register your business as an LLC (limited liability company) or some other corporate formation. Check with local authorities. It will also depend on whether you are local or not.
Self-employed people working from home (not as an employee) use Schedule C to report their business income and deductions. As an owner of a home business, what follows are some home-based business tax deductions you can claim.
Office at Home
You want to think twice before claiming a home-office deduction on your taxes. Your office at home needs to be exclusively used for that purpose—and regularly—before you claim it—or you could face an IRS audit. The U,S, Chamber of Commerce says you cannot claim a home-office deduction just because you work from home.If you can claim a home-office tax deduction for your business, there may be several additional deductions you can claim. They include prorated (by a percentage of your home space used for business) portions of your:
- Fees for homeowners association membership
- Home insurance
- The cost of mortgage insurance with interest
- Utilities
- Cleaning services and cleaning supplies.
- Maintenance and repairs.
Vehicles
You can also deduct the business use of your car or other vehicles. If you use your car for non-business purposes, you can deduct the business portion either by the percentage of miles used for business or by actual miles. When using percentages, be sure to use the same percentage to calculate the tax deduction for insurance, repairs, and maintenance. The cost of tolls, parking, and special permits can also be used for tax deductions.Instead of using a percentage of use, you can also get a tax deduction for business miles traveled. The per-mile rate the IRS allows for the first six months of 2022 is 58.5 cents per mile—up 2.5 cents per mile from 2021. In July, because of high gas prices, the IRS raised the standard mileage rate to 62.5 cents per mile for the last half of the year.
Internet and Cellphones
Since your home business probably depends on using both the Internet and a cellphone, you are allowed to deduct a portion of the expenses. SmallBusiness.Chron says that because you probably use the Internet and cellphones for some personal use, you will have to prorate the percentage of business use.Health Insurance Premiums
Self-employed people can deduct the cost of their insurance premiums. It includes the cost of your health, dental, and long-term care premiums. Investopedia says that you can also claim the cost of insurance premiums paid for children under the age of 27—even if they are not dependents that you claim on your tax forms.Business Meals
The cost of business meals can be deducted from your taxes while traveling. This tax deduction enables you to deduct the cost of meals while on the road, attending conferences, or entertaining clients. Investopedia reports that you can now deduct 100 percent of the cost of the meals—if not extravagant—but only through the end of this year. After 2022, the deduction goes back down to 50 percent. The exception to this is whether or not the meal comes with entertainment. Unless the meal has a separate receipt from the entertainment ticket, it cannot be counted as a deduction.Employee Salaries
Any money used to pay employee salaries counts as a business deduction. You must take out Social Security, Medicare, etc., for yourself and your employees and send it to the government.Office Equipment
The equipment and supplies you use in your home business are deductible as long as they are necessary for the conduction of your business. More durable equipment, such as laptops, is depreciated over three years.Travel
Travel expenses are tax deductible, but they must include overnight trips and not be extravagant. The IRS says that most any expense is deductible when traveling, as long as it is necessary for your business. It may include things like airfare, train, bus, or car costs, taxis, hotels, car rental, meals, shipping of your baggage or displays, dry-cleaning, tips, etc.Professional Services
Anytime you hire a professional service for your business, the cost can be considered a deductible business expense. It can include the cost of hiring an accountant, legal counsel, contractor, consultant, etc.Marketing
The cost of ads or promotions—or hiring someone to do it for you—is a tax-deductible expense. Designers of your ads, websites, printed materials, etc., are all deductible.Quarterly Taxes
Normally, an employer would collect the various taxes taken from their employees paycheck every pay period. The self-employed and freelancers do not have someone taking taxes out for them, so they must take it out themselves and send it to the government.These taxes are paid quarterly to the IRS so that they do not become too large at year’s end, and the IRS expects them by a specific date. There are also penalties if not paid on time. TaxpayerAdvocate.IRS.gov says that if your taxes are late—or not enough—you will pay a penalty even if you are due a refund.
CNET says that the IRS expects quarterly payments from you if your annual taxes will be more than $1,000. Otherwise, send the amount with your 1040 taxes.
You need to be aware that if you receive payment for work through various online payment apps such as PayPal, Venmo, Zelle, etc., those companies report all payments sent to you that are $600 or more.
As a home-business owner, you can claim many deductions at tax time. Talk to an accountant to be sure you get all of them you are eligible for to keep more money in your pocket.
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