Wednesday, October 8, 2014

8 Home Office Tax Deductions for Small Businesses

RSC Accounting, Tax & Consulting Services  writes: One benefit of owning a home business that will never go unnoticed is the tax breaks you can claim. If you’re looking into (more) ways you can save money by working at home, but worried about what the IRS might think, this article will lay to rest some of your worries.
The key is to use the term “home office” the same way the IRS does. If your space is devoted to your business and nothing else, you’re on the same page as the tax agency. If, however, your office doubles as a guest bedroom, you might have something to explain to Uncle Sam.
Let’s look at the following list of tax deductions that you’re entitled to as a home-based business. But first, always follow the primary rule of running a home-based business: keep track of everything.

Keep Detailed Records

It’s imperative that you keep a detailed account of all your business activity. Every purchase, from printer paper to computer cords, should be logged digitally or written down in a journal, with receipts attached or scanned into the computer. Mileage, phone calls, and all other expenses related to your business should be recorded.
The more detailed and organized you are, the easier it will be when tax time rolls around. You’re also preparing for a potential audit, which you can be more at ease about since you kept track of everything along the way.

Tax Write-Offs for Your Home Office

1. Workspace

Whether an entire room or part of a shared room is used exclusively and regularly for your business, you can write off the space as a percentage of the total house/apartment. Obviously, it’s easier to deduct an entire room, but it’s possible to deduct a section of a room if the division is clear. You are technically violating the exclusive-use requirement if you allow others to use your workspace for anything other than work, and this happens more than it would if you worked at an office building.
Measure your work area and divide that by the square footage of your total living area. This percentage is the fraction you can claim as home-related business expenses, which includes utilities, insurance, rent or mortgage. See if you qualify for the Home Office Deduction, which offers a simplified option for home office tax deductions.

2. Office Supplies

Paper, ink toner, pens, staples, paperclips, etc. are all accepted and expected home office tax deductions that you can claim. They are necessary purchases for most businesses, but you still have to prove that you use them for business (of course).

3. Equipment and Furniture Upgrades

Here’s a category that is 100% tax deductible for home offices. If you’re in the market for a new computer, upgraded software, a new desk, office chair or other furniture, you can deduct these expenses incurred within the year.
We don’t suggest trying to write off that widescreen TV, however. Only purchases that are primarily used and necessary for running your business should be considered. If that new laptop or tablet is used for personal purposes, too, you can only deduct the percentage of the equipment used for business. Remember that you need to justify every tax deduction you claim.

4. Phone Bill

If you regularly make or receive phone calls to and from clients, it may be helpful to get a second phone line for business. If it’s an occasional phone call, keep track of the date, time and reason for your phone call and circle it on your regular phone bill to deduct at tax time.

5. Internet Usage

It can be tricky to write off your time on the Internet if your work computer also has personal use, or if others in the house have access to the computer. When it comes time to submit your taxes to the IRS, pick a reasonable percentage. If the computer is used solely for your business, you need to prove that your spouse and kids aren’t using the computer, too. The IRS will assume that’s the case.

6. Entertaining Clients

Staying with the common theme of being reasonable, taking your clients and leads out for lunch or dinner is an acceptable tax deduction. You can only deduct 50% of the meal, not the entire bill.
Don’t abuse it or make excessive or extravagant claims. You’re less likely to be audited if you claim a reasonable deduction for a well-paying client who brings you a lot of business over the fiscal year, and you happen to jot down the business matters discussed on the back of the saved receipt.

7. Travel Expenses

Your day-to-day mileage incurred for business purposes is considered a tax deduction if you work for yourself. Track any trips related to business (such as meetings with clients and seminars). Longer trips, like far-away conferences that help grow your small business, can also be written off. Transportation costs (plane tickets, taxis, parking, rental cars) are 100% tax deductible, (50% of) food expenses, lodging and dry cleaning are all tax deductible.

8. Retirement Savings

Even when the monthly cash flow is tight, it’s always advisable to think about your future. Small business owners, freelancers and independent contractors should save money in a tax-deferred retirement plan. You can choose to contribute the bare minimum if you wish. It will ensure a more solid future, and it can also lower your taxes.