15 Tax Deductions You Should Be Making for Your Home Business
Pencils? Toilet paper? Work lunches? Find out what the IRS allows you to deduct -- and what it doesn't.
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As the holidays glide by and 2016 wraps up, tax season will be here before you know it.
Related: So You're Being Audited. Now What?
There's usually a very audible groan when this phrase comes up, particularly for those who run their own businesses. Self-employment tax is one of the toughest costs to handle for startups, and it's easy to get gouged by the IRS if you don't approach your taxes correctly.
Protecting your revenue is all about taking as many legal deductions as possible in order to reduce your taxable income. A lot of the money you spend in pursuit of your business can be deducted from your taxes to reduce the tax burden on you. Here are some deductions you may not have considered.
1. Home security system
You can't deduct your personal home security system, but you can deduct a security system that's meant to protect your home business, according to IRS Publication 587. To make this happen, you must use a portion of your home exclusively as a place of business, store inventory there, use your home as a daycare facility, or use it as a place where you regularly meet clients.
Compare the costs of installation to possible tax deductions to get the most from your investment.
Any mileage incurred in the pursuit of business can be written off. Mileage is usually a more realistic deduction than something like a first-class trip to Boston. It's much less likely to attract an audit.
3. Pencils, ink, and other office supplies
Paper, ink toner, postage, staples -- any supplies used exclusively for business can be subtracted from your taxable income.
4. Square footage of your office
If you have a room in your house or apartment or a portion of a room dedicated that you use as your home office, you may deduct that square footage. However, this is only if the room or corner is dedicated exclusively to work. You can't use your dining room table as a family gathering place and your office and still justify the deduction.
To deduct a portion of your office, you'll calculate the cost of using just that space. For example, if you pay $800 per month for a 700-square-foot apartment, and a 100-square-foot bedroom becomes your home office, you can claim one-seventh of your rent on your taxes. In this case, that would equal $114 per month.
For some, the method of calculating the portion of rent or mortgage is too confusing and complicated. To simplify this method, the IRS mandated in 2014 that you can claim $5 per square foot for your office, up to 300 square feet. So, you could write off $500 in a year for that space.
5. Utility bills
The principle with your home office deduction applies here, too. You can deduct a portion of your utility bills to compensate for being at home all day. In the same case as above, you could deduct one-seventh of your monthly utility bill for your home office.
6. Toilet paper and cleaning supplies
Many people don't think about this, but it's something to consider. You'll be using your home bathroom while you're working, after all, so toilet paper can be considered an office expense. It's the same for cleaning supplies used to make the office look presentable for clients. If you work very long hours and have clients coming through your home often, this can be a very helpful deduction.
Note that the only way to really know how much you can deduct for this category is to purchase toilet paper and cleaning supplies used exclusively during office hours. Otherwise, there will be too much overlap to make this a viable option.
7. Phone and data bill
It's best to get a phone specifically used for business, in which case you could write off the entire cost of the phone and the monthly bill. But many home business owners prefer to use their personal phones for making phone calls, writing emails and sending off a quick SMS. If that's the case, you can deduct only a portion of your monthly bill for business expenses.
Any time you attend a conference, meet a client, or travel for work purposes, you can subtract this transportation cost. Included here are plane tickets, bus fare, taxis, rental cars, airport parking, etc. You can also take a credit for lodging and tips and 50 percent of meals for days spent doing business.
9. Work lunches
Deductions for work lunches apply only when you meet with a client strictly for business purposes. You can't take your employees out to lunch on a whim and call it a deduction.
10. Health insurance
This may surprise you, but those who are self-employed can potentially deduct the cost of health insurance for themselves and their family. This is because they don't have the benefit of an employee-subsidized plan, so the tax break takes some of the blow off this expense. There are limitations, however. See IRS Publication 535 Business Expenses to learn more.
Your desk and office chair are automatic deductions for your home business. If you have any furniture for clients to sit on when they visit your office, that can also be taken off at tax time. Note that you can deduct this cost only once, although you can have the deduction split into several years to maximize the benefit. But most home businesses don't buy enough furniture for the latter option to matter.
12. Software, subscriptions and applications
Any technical service or application you pay for can be fully expensed in the year purchased. This includes your website domain, plugins, templates and other services, which will be subtracted from business taxes. Again, this is a one-time deduction.
Computers, tablets, smartphones and other tech gadgets used exclusively for business are eligible for a one-time deduction. Any time you replace your devices, you can also gain a tax benefit.
14. Client gifts
The holidays are here, and many home businesses like to cement their connections with clients by offering gifts at the end of the year. Go ahead and splurge on these gifts, because you'll be able to deduct their cost from your taxes.
15. Business vehicle
If you purchase a vehicle that's used solely for business, you can take away the full cost of the vehicle (including depreciation), fuel, insurance and maintenance over several years, to make the most of this benefit. If you use the vehicle partially for personal reasons and partially for business, you can deduct a small percentage for your taxes.
Tax deductions are a standard procedure for every business, but be aware of limitations on deductions. The list in this article includes general ideas of things that can be deducted, but every tax break listed must actually be used for business purposes. Otherwise, it's considered cheating on your taxes, which the IRS won't appreciate.
Don't think your small business is safe from an audit just because you're small. Routinely, the IRS will audit small businesses in search of discrepancies. It will also audit you if it suspects any irregularity or dishonesty on your taxes, and very few startups can survive the penalties associated with this form of cheating.
So, being as honest as possible is always the best policy for an error-free tax season. Keep impeccable records of your spending to ensure proper documentation for your taxes. This will ensure a clean tax record and significantly reduce stress in the weeks up until April 15.