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One of the major advantages of being self-employed or having your own home based business is that there are many allowable deductions that you can claim against your tax obligations to the federal government. These can all be found, itemized, on the website of the Internal Revenue Service (IRS).
What is important is to make sure you document all your business-related expenses and to have them documented properly.
Since a lot of small businesses get audited, and the rate is rising dramatically in recent years, keeping in mind the following top 10 home business tax deductions may help you avoid paying additional taxes and go through the audit process quickly and confidently.
Home Office Space – If you are devoting part of your home exclusively for the use of your business operations, you can allocate a certain percentage of the total area of your home and deduct it from your taxable income as office space. The IRS allows specific calculations for the allowable deduction. There are businesses, however, that require the actual acquisition prior to using it as a business office. Make sure to check the applicable regulations for your industry before operating the business to avoid disqualification from claiming the deduction. If audited, the examiner will want to see a diagram of your home/office space and square footage allocated.
Health Expenses – All medical-related expenditures for individuals not covered by group insurance are allowed by the IRS for deductions. If the insurance deductible exceeds $1,000, the insured may set up a heath savings account. The amount must be set aside prior to the payment of taxes to pay for the deductible, prescriptions, and other health expenses outside of the insurance coverage.
Insurance Premiums – Premiums paid to cover persons ineligible for group insurance can also be used as tax deductions if they can be supported with valid receipts. Car insurance premiums are also allowed provided you can show records that can clearly show official use of the vehicle for the business such as odometer readings for the tax period. The IRS rarely questions well-supported records. This is one of the top 10 home business tax deductions that people usually overlook.
Utilities and Services – You can claim as deductions the phone lines exclusively used by the business. This will also include installation, monthly service fees, and long distance charges. If you are using your cell phone exclusively for business purposes, you can also deduct the entire bill from your taxable income from business. Otherwise, you can only deduct the portion of the charges attributable to the business. The power and water charges can be pro-rated between home and business use, and the portion for the business can be claimed as a deduction.
Casualty Losses – According to the IRS, loss of business income arising from equipment loss, damage to the office, and cost of repairs are allowable deductions. If necessary, you may consult a tax professional to determine which taxable year the claims can be made, especially when the expense extends beyond one year. For tax purposes, actual receipts are required and mere cancelled checks will not do. Be careful in making your claims as the IRS can sometimes be strict in this area.
Car Expenses – You can deduct mileage based on the federal rate established at the start of the taxable year as a percentage of the total mileage covered within the year. Again, proper recording of actual trips made must be observed, which may later be required for presentation to the tax auditor.
Travel Expenses – The IRS understands the importance of business trips and therefore allows related expenses for deduction. However, proper recording must be maintained as the IRS will question and may disallow expenses that seem to be incurred solely for pleasure and personal benefit. Make sure to provide sufficient documentation for expenses that at first glance may seem like personal and not business-related expenses to avoid confusion about valid expenses.
Computers, Software, and Supplies – Depreciation for the office equipment can be claimed as deduction from annual taxable income. Different rules apply for claiming deductions for capital equipment, furniture, and software; and for consumables or supplies. The IRS website provides more details about this particular allowable deduction.
Moving Expenses – When your business grows or expands, the home office may be outgrown and may require moving to a bigger office space. The cost for moving in to a new rented or owned office is allowed for deduction. However, if the entire family is moving to a new home, a particular portion of the moving cost pertaining to the business may be allowed under certain IRS rules.
Research Materials – Training manuals, videos, subscriptions, and books can also be allowed as valid expenses. Keep official receipts that will prove that the materials are really essential for the business operations.
The key to hurdling tax examinations and audits is the presentation of clear and well-maintained business records, this cannot be emphasized enough and doing so allows for safely using aggressive deduction strategies. This will make the job of the tax examiner a lot easier, and it will give him the impression that you have nothing to hide especially when the basis for the deductions you are claiming can clearly be seen. He can then be more lenient and may just opt to overlook small lapses you may have committed. For further information on the top 10 home business tax deductions, refer to the IRS website or speak with your certified public accountant.
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