Starting a home business, even a part-time one, is a great idea for some people. Not only will a business provide the potential for extra money, it will also provide a variety of tax deductions. This means even if the business doesn't make very much, the tax deductions available can be used to offset your regular employment income. In addition, there is always the potential of your home business taking off, allowing you to quit the corporate rat race and be in full control of your financial life. (For more, read Top 10 Home Business Tax Tips.)
SEE: Can You Handle A Home-Based Business?
Deducting Home Business Expenses
The IRS is extremely accommodating to small businesses. Its mandate from the government is to offer tax incentives and support to small businesses, part-time home-based businesses included. This means that the tax code has a variety of business expenses that can be deducted from your taxes. This article will explain how to deduct and list several of the more popular deductions for home businesses.
Small business tax deductions are taken on schedule C of the traditional 1040 tax return. These deductions are used to offset the taxable gross income on the return. What's very appealing to small, part-time home business owners is that the gross income can include salary from regular employment. This means that business losses can lower your overall tax liability quite substantially. This alone is a prime reason to start a small, home-based business. Just keep in mind, for the business tax deductions to add value, they need to exceed the standard deduction that everyone gets on their tax return. If the deductions do not reach the standard deduction threshold, it makes little sense to itemize and is smarter to use the standard deduction.
The major hurdle to deducting home business expenses is differentiating between personal and business costs. The IRS is very clear on this matter. You can not deduct personal expenses on your tax return. However, if you have expenses that are used partially for business and partially for personal use, the percentage used for business can be deducted on your tax return. (To learn more, check out How To Qualify For The Home-Office Tax Deduction.)
Tax Deductions for Home Businesses
Here are the three primary tax deductions for home businesses:
This means that the space used in your home or apartment exclusively for business can be deducted. For example, if you pay $1,000 per month for rent and use 25% of your space strictly for business, $250 per month or $3,000 for the tax year can be deducted.
Travel, Gifts and Meals
These are great deductions. Any business-related travel can be deducted. This includes all expenses incurred on the road. However, when traveling, only 50% of meals can be deducted. Any gifts given to clients are 100% tax deductible. Just remember to keep things within reason unless you want a lot of questions from the IRS.
Any business use of your automobile is tax deductible. There are various ways to take advantage of these deductions. These include mileage and depreciation.
The Bottom Line
Remember, these are simply suggestions. It's always smart to seek the advice of a licensed tax professional prior to filing your taxes.