Allowable Tax Deductions for a Home-Based Business
A home-based business gives an individual a lot of freedom, but it also requires a little more responsibility. There are many tax deductions a self-employed person can take; but in order to take advantage of these allowances, the individual must be diligent to keep track of the expenses all year long and must save the receipts as proof of all expenditures.
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Home Office Deduction
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The biggest deduction for home-based businesses is the home-office deduction. This deduction is for a percentage of the cost of mortgage, insurance, heating, cooling and electricity bills for the home. To calculate this deduction, measure the square footage of your home office and divide by the total square footage in your house. Next, add up your total bills for your mortgage, insurance, heating, cooling and electricity and multiply the total by the percent of space your home office takes up in the house. This amount is a tax deduction. In addition, you can take a deduction for a dedicated business phone, or for the percentage of calls made for business purposes on your main line. You can also deduct the cost of your Internet service. Assuming you have two computers in the home -- one for business and one for family usage -- you should take half the cost of the Internet service for the year. If you have more computers in the home, base the percentage of Internet expense on the percentage of computers in your home that are for business use.
Purchases
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Anything you purchase for business use is an allowable tax deduction. This includes big purchases, such as office furniture, computers and printers; but it also includes small purchases, like all of your office supplies -- pens, paper and printer ink -- and anything else that is necessary for you to do business. You can also include costs to repair any items bought for business use.
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Travel and Mileage
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When you travel for business, 100 percent of the cost of travel can be deducted from your taxable business income. This includes the cost of gas to drive or the cost of tickets for train or plane travel, as well as the cost of your hotels. Meals eaten while you are traveling are also deducted, but not at 100 percent. Half the cost of your meals can be deducted when you travel for business. As for local driving, from the moment you leave your house for work-related errands, the mileage counts as a business deduction. Keep a small notebook in the car and jot down the miles driven each time you go out for business purposes. The IRS allows you to take a certain amount per mile as a deduction. In 2010, the mileage rate was 50 cents per mile, but this is subject to change. Note that these rules are for the self-employed. If you telecommute to work from a home office, your mileage rules are slightly different, so talk to your accountant or tax professional before taking a deduction.
Other Deductions
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Besides the major expenses, a self-employed individual can also reap benefits from things like investing in a retirement fund, purchasing health insurance, and even paying taxes. Self-employed individuals pay approximately 7.5 percent higher taxes to cover the employer's share of the Social Security tax, but half of this expense gets to be taken as a deduction. Talk with your financial adviser or accountant for help finding qualified health insurance and retirement plans for the self-employed.
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References
- Photo Credit at home office image by Pix by Marti from Fotolia.com
