Tax Deductions for the Small Home-Based Business
Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.
– Judge Learned Hand
The Bad News
If you work for someone else and receive a copy of IRS form W-2 at the end of the year, you are among the most heavily taxed segment of the U.S. population. How heavy? Odds are that you pay more in taxes each year than you pay for your housing, food, and medical expenses.
The Good News
Owners of small home-based businesses are eligible for more tax deductions than any other category of business owner. And it’s pretty easy to qualify. All you have to do is start a legitimate home business, work it on a regular and consistent basis, and meet some pretty easy IRS requirements along the way. (And, “regular and consistent” can be as little as four or five hours a week.)
Do that, and the resulting tax savings (which could be in the $3,000 to $6,000 range) could cover most, maybe even all, of your business expenses. (This is where I insert the appropriate legal disclaimers and send you off to talk to a qualified tax advisor!)
Even better, if you can estimate what the deductions will be, you can modify your withholdings at work as soon as you start your business and start seeing larger paychecks right away.
Six Primary Home-Based Business Tax Deductions
Based on my research, here are the top 6 tax deductions available to owners of small home-based businesses:
1. Business use of your home or apartment.
If you have an area of your home that is used regularly and exclusively for business purposes, you can deduct a portion of your mortgage or rent payments, utilities, repair costs, and other home expenses based on the area of your home office in comparison to the total area of your home.
At the time of this article, the government will let you deduct over $0.55 per mile when you use your personal vehicle for business purposes.
3. Hiring your children
You can hire your children if they are between the ages of 6 and 18. Their salary is an expense and the first $5,800 of their income is tax free. That beats just giving them an allowance in a lot of ways.
4. Hire your spouse.
Your company can offer benefits to its employees such as coverage of out-of-pocket medical expenses. (Again, check with your tax advisor. It’s probably important to set this up right the first time.)
5. Business Travel
Business travel is deductible, even if it’s combined with personal travel. Things change, but the last I asked, if you spent any part of the day on a legitimate business activity, you could deduct your travel expenses for the entire day.
6. Business Entertainment
Take a prospect to lunch and you can deduct 50% of the tab. Other entertainment expenses qualify as well.
The bottom line is that the tax deductions available to owners of small home-based businesses can both help improve the bottom line of your business; and, for those who continue as a W-2 employee, provide extra money to help run the business by simply adjusting your withholdings to reflect those deductions. It’s almost as if the IRS wants you to have your own small home-based business!
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