Here's news: According to the Small Business Administration (SBA), more than half of all U.S. businesses are home-based. Individuals are turning to home-based businesses to pursue their entrepreneurial dreams and achieve a better work-life balance.
Running a home-based business offers numerous advantages. First, it lets you set your schedule and create a work environment that suits your needs. No longer bound by rigid office hours or commuting constraints, you can structure your day to maximize productivity and personal fulfillment. But running a home-based company also comes with many responsibilities and challenges, especially when filing business tax returns. Read this Huddle Business Capital blog article to learn some helpful tax tips for home-business owners.
Keep accurate accounting records.
If you run a home-based company, you are busy handling a number of business-related tasks. That said, it is crucial to allocate time to maintain accurate bookkeeping. By regularly recording your company's income and expenses, you can clearly understand your company's cash flow and overall financial health at any given time.
Moreover, you won't need to rush when it comes time to file your company's taxes. By maintaining organized financial records, you will be well-prepared for tax season or any regulatory requirements specific to your industry.
Dedicate a separate area in your home for your business.
In order to claim a home office deduction, you will need to allocate an area in your home to conduct business. This workspace must be used exclusively for business throughout the year. It is important to note that a space (office, room, den, etc.) used for business and personal use is typically not deductible.
When calculating your home office deduction, you will need to complete IRS Form 8829, "Expenses for Business Use of Your Home," to determine the qualifying business expenses of your home on your Schedule C (IRS Form 1040).
Calculate your home office deduction and expenses.
Calculating a home office deduction and expenses is an involved process, so having an accountant assist you is a good idea. They understand the latest tax laws relating to small businesses, particularly home-based companies, and can ensure that everything is done right. An accountant can also explain the differences between the simplified deduction and the actual expense deduction (also referred to as the "regular method") and which is best for your business. Following is a broad overview of each.
The simplified method lets you deduct a specific dollar amount per square foot used for your home-based business up to 300 square feet. Additionally, you can claim home-related deductions on your Schedule A.
The actual expense deduction ("regular method") lets you deduct the depreciation of your home, which could result in more significant tax savings. With this deduction method, you will need to tally up your home expenses and multiply the total by the percentage of your home that is used for business purposes.
Next, list the eligible home business expenses you can write off on your tax return. These may include mortgage interest, business insurance, utilities (electricity, heating), and property taxes. An upcoming section of this Huddle Business Capital blog features a list of general business expenses.
Home office tax deduction example.
In order to determine your home office tax deduction, you will need to divide the square footage of your home office workspace by the total square footage of your home. To illustrate how this works, let us use a home-based online tutoring business as an example.
The owner has a 2,000-square-foot house and a 400-square-foot office (20 x 20 feet square) used exclusively for business purposes. To determine the home office deduction, the owner's accountant divided 400 by 2,000, which is 0.20 (or 20%). So, 20% of the owner's home expenses can be put toward the home office deduction.
Keep track of general business expenses.
By understanding the details of general business expenses, tax deductions, and tax write-offs, you can optimize your financial resources while staying compliant with the law. Keep track of your general businesses throughout the year by saving receipts and inputting your expenses into your accounting books.
Every home-based business is unique, but some of the most common expenses include computers, software, headsets, microphones, office furniture (desks, lamps, chairs), website domain registration, website hosting, Internet, office printers, scanners, and office supplies (printer ink, pens, pencils, stationery, etc.).
File your tax return on time.
Preparing your home business tax return can be daunting, but it can be manageable with robust tax planning software or professional assistance from an accountant. If you hire an accountant to file your return, they can help you quickly navigate the necessary IRS forms and ensure that all required fields are completed accurately.
Whether you file your taxes or hire an accountant, filing your return before the deadline is essential. Doing so can help you avoid unnecessary penalties, audits, and charges and keep you in good standing with the IRS.
Disclaimer.
This Huddle Business Capital blog article is purely educational and contains general information and opinions; it is not intended to provide advice or recommendations of any kind.
