9 Tax Tips for Work at Home Business Owners
You probably already know that filing taxes for a home-based business is quite a stretch from filing with a single W-2 form. When you run a home-based business, preparing your taxes becomes a much more complex and multifaceted state of affairs. However, this also means that you have many opportunities at your finger tips for whittling down how much you owe in the end.
These are 9 simple, yet effective tips you can use when preparing to file your taxes. Keep in mind that these are basic tips, and you should always prioritize specific advice from your CPA or accountant. Filing taxes is a situational process, and it's advised that you always keep your realistic situation in mind when using generalized advice.
1. Include Your Home Office in Your Deductions
It often goes over many business owners' heads, but a home office that is used exclusively for work can be counted as a deduction. Of course, if your living room couch doubles as a work area, you likely won't be able to count it as a deduction. However, if you've designated a particular room or area for strictly work, particular housing costs will be eligible for deduction. Specifically, this means you'll be able to write off a small percentage of expenses such as monthly rent payments or home/renter's insurance.
Likewise, your home utilities and office supplies can be deducted. A small percentage of your electricity / heating / internet bills will be eligible for deduction, and you can completely write off work-related supplies such as paperclips, paper, sticky notes, postage, ink cartridges, etc. Even your work computer or iPad can be deducted. Keep in mind that this is all highly dependent on whether or not you can prove that these items are used for work-related purposes.
2. Account for Every Travel Expense
Take a moment to think about the amount of business-related trips you take in a year. This includes travel to conferences, meetings with clients, etc. Now, think about any related costs such as taxi fare, airport parking, hotel lodging, meals, etc. All of these expenses that are directly related to your business travel can be deducted. To receive each deduction, keep each and every receipt that you are given.
On the back of each receipt, jot down details that pertain to the purchase. For example, you might make a note on a lodging receipt from a hotel that you were in town to meet a client. Write the name of the client, what was discussed during the meeting, and what the two of you did while together. This will make it much easier for your tax accountant to deduct the expense at the end of the year.
3. Deduct Appropriate Meal Expenses
Of course, you won't be able to deduct each and every meal that you have. However, business-related meal expenses are deductible by 50%. This means that if you take a client out for lunch and end up spending a grand total of $64.50 (including the tip), you can deduct roughly $32.25.
It's extremely important to remember that the IRS actively searches for suspicious activity and excessive deductions. In other words, once the end of the year rolls around, you likely won't be able to deduct a $200 bottle of Pinot Grigio that you shared with a client over lunch. If you want help with your deductions, keep things simple and always write down a few details about the meal on the back of the receipt. For example, write down who you met with, as well as the matters that were discussed.
4. Keep Your Health Insurance in Mind
If you're operating a home-based business and simultaneously receiving health insurance, you might be able to deduct the costs of the insurance during tax season. Keep in mind that this doesn't apply if you're receiving coverage (or are eligible to receive coverage) via a spouse's/partner's employer-subsidized plan. Talk to your tax accountant to weigh out your options.
5. Go for a Tax-Deferred Retirement Plan
Operating a home-based business is a tough gig, and for those who are just getting their toes wet, cash flow is probably extremely tight. This means that it's probably seemingly unfeasible to start up a retirement plan. However, what you might not know is that storing money in a tax-deferred retirement plan can significantly lower your tax bill at the end of the year. Even if you can only contribute a small amount at first, it's highly recommended that you start a tax-deferred retirement plan as soon as possible.
6. Double Check Your Business's Entity
The reason many business owners miss out on particular tax opportunities is solely because their businesses' entities are incorrect. If you've expanded past the state of a home-based business, update your entity to reflect this. Likewise, if your business still isn't official, now is probably a better time than ever to change this. Register your business within your state, and ensure that you utilize the help of a tax professional when doing so to ensure you choose the right entity.
7. Actively Avoid Audits
Many home-based business owners dread the end of the year and merely hope that they aren't audited once that time comes. The best way to avoid audits is to actively prevent them. This means that you'll need to completely audit-proof your business and its processes. The way you do this will heavily depend on the type of business you're running. For example, you might need to begin keep record of your mileage, calendars, or personal use logs depending on your business type. Your CPA or tax accountant will be able to provide a wealth of information about how you can avoid audits whilst operating your specific type of business.
8. Choose the Right Tax Professional
You see a dentist for your teeth and an optometrist for your eyes, so why wouldn't you use the help of a specialist for your taxes? It's extremely important to not only find someone with experience in organizing business taxes, but also organizing tax filing for your type of business. Using an experienced tax accountant will help you avoid countless missed deductions, as well as save you the time and effort of attempting to learn tax law. As far as your home-based business is concerned, it's strongly recommended that you forego the DIY tax software and leave the matters to a professional.
9. Managing Your Taxes is a Year-Round Effort
Lastly, never forget that your tax matters are important during all parts of the year. Unless your business operates on a seasonal time frame, you'll need to stay on top of your taxes virtually at all times. It's strongly recommended that you not only implement strong tax strategies and procedures, but also hire a knowledgeable and experienced tax accountant.
For simple tax situations, it's quite okay to manage taxes once per year. However, a home-based business requires year-round tax management. This is what will help you discover missed deductions, avoid costly mistakes, and pay as little as possible once the end of the year rolls around.