Have you quit your 9 to 5 cubicle job to make your hobby a home-based business? You’re not alone – about 53% of all small businesses are home based. You won’t have Janice in accounting to take care of your taxes anymore, and it shows; only a small amount of those business owners claim the many tax deductions available. Below are tips on how to maximize your deductions and contribute to the success of your at-home money mill.
Did you know you can structure your business to put yourself in the best financial situation? Passing money along to a tax-deferred retirement plan is one of the best ways to lower your taxes. Even if you contribute the bare minimum, set one up. As a business owner and sole proprietor, you know full well self-employment taxes are a reality. If you form a corporation or an LLC, you might reduce these taxes, because you can pay yourself a ‘reasonable salary,’ as defined by the IRS, and any remaining profits are taken as profit distribution (not subject to self-employment taxes).
As a business owner, you probably know that claiming deductions can be nitty gritty. That’s why like your personal taxes, and perhaps more so, it is crucial to stay organize and keep records. Deductions outlined below, such as business lunches and travel, can get lost in your bank statements, or be mistaken for personal expenses. Put a system in place, write it all down, and keep a digital copy of everything, especially if Uncle Sam comes knocking with questions.
One of the widely known and oft-deducted expenses is that of the home office. In 2014, the IRS made this simple by allowing business owners to claim $5 per square foot, up to 300 sq ft. However, many home business owners stop there or shortly after.
Here’s the ‘but wait – there’s more’ epiphany: think of all the paper, toner, postage, and other office do-dads that you purchase over the year. Don’t ignore these fully deductible expenses. Also, electronics or tech equipment, like a laptop or DSLR, are also deductible, as long as it clearly serves your business. If, by chance, you also use your tablet to take pictures and surf the internet while traveling, you can only deduct the percentage of corresponding time that you dedicate it to money making.
Speaking of travel, if you do so for work, you can deduct transportation, lodging, 50% of your meals, and more. Expenses pertaining to traveling to meet a client, purchasing business supplies, conducting research, etc. also count. Don’t forget jazzing up the office, especially if you bring clients in. Necessary and useful furniture, like a desk and lamp, are certainly deductible, but that Monet isn’t, so don’t get too spendy. Lastly, if you don’t participate in your spouse’s or partner’s employer-subsidized insurance, you’re not eligible, but all others can deduct the cost of health insurance for themselves and their family.
Owning a home-based business means taking the time and putting in the elbow grease to separate your personal and business finances, recording your expenses very closely, and keeping your accurate records in a safe place – it’s all part of the home-based business sphere. The tax code changes every year, so keep up to date on expansions and restrictions for possible deductions. Luckily, the IRS is pushing to simplify the tax process for home business owners – hopefully the option to claim a standard deduction, like individual taxpayers do. In the meantime, get your spreadsheets ready!
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