Starting a new business may have its ups and downs.
However starting a new home based business can relieve some of the monetary stress of a new venture. With unlimited opportunities to save funds in a home based business, you’ll definitely want to keep good records so you can deduct many of your expenses on your taxes. Make sure you run a professional business from day one and remember not to co-mingle personal and business monies! We’ve listed a few potential areas you’ll want to keep in mind when starting and running your home based business.
The home office is one of the best-known tax advantages for a home based business, and for good reason. You can deduct a percentage of most household bills (mortgage or rent, utilities, property taxes, insurance, phone and Internet bills) based on the percentage of your house that is represented by your home office.
Make certain to accurately calculate the square footage of your home office, having a well defined, secured room is usually best. IRS publication 334, Tax Guide for Small Business, is helpful in determining details on home office deductions.
Any improvements or repairs to your dedicated home office space are deductible as business expenses. For instance, if you paint your home office, the costs are deductible. Don’t forget to keep track of other office expenses such as printer paper, postage stamps, office furniture, and your computer.
Some items you may not consider as business expenses are also tax deductible! Items such as the tax preparation fees for your business, transportation expenses, and education expenses for classes or certifications to hone your business skills. Whether traveling to and from business meetings or having a business lunch with a client, keep your receipts to tally the costs up for tax time! Did you know software purchased to use for your business such as QuickBooks or Anti-virus software programs are also deductible business expenses. (check with the IRS for specific guidelines on deduction limits)
All the items you need for your business – beads for your jewelry business, fabric for your dressmaking business, pencils and calculators for your tutoring business – are deductible as business expenses. Depending on your type of business, these can add up quickly. Make sure to keep or properly document all your receipts.
Do your kids help run small business errands for you? You can hire your child to stuff envelopes, take inventory, or to help walk dogs for your dog-sitting business! This results in an additional business expense deduction for you, as well as income for your child. Be sure to document all the hours worked by family members (or any employee you hire) in case you are ever audited.
Many home based businesses use IRS Schedule C to report income and expenses. All of the expenses listed above will be subtracted from your business income, lowering your taxable income (which is good, since your net income is what you will be taxed on).
It is very important for any home businesses to maintain accurate record keeping. You want to be prepared to turn over a neat log of all business expenses, complete with dates, amounts and confirming documentation to your accountant or IRS representative if needed.