June 14, 2018
Unbiased Financial Information Provided by Financial Finesse
Do you ever work in your bathrobe at 2:00 a.m.? If so, chances are you operate a home-based business. Whether your business is full-time or part-time, you get to write off the expenses of running it -- and this can save you a bundle at tax time.
The Internal Revenue Service says a business expense must be both ordinary (common and accepted) and necessary (helpful and appropriate). If you own your business as a sole proprietor, business expenses are deducted directly from the gross income of your business on Schedule C (Profit and Loss from Business).
What Can You Deduct?
Deductions can vary with your type of business. Let's assume you don't have employees (except for maybe your spouse or kids) and you have a room or area in your house that you dedicate exclusively to the business. Here are common deductions for this scenario:
- Car and truck expenses -- You can deduct the portion of your car that you use for business. The deduction can be based on actual expenses (including depreciation) or you can use the IRS standard mileage allowance (54 cents/mile in 2016, 53.5 cents/mile in 2017), so use whichever method will give you the highest deduction.
- Depreciation -- If you buy an expensive piece of equipment that's expected to last more than one year, you can write off as much as $500,000 in qualifying business expenses. This is called the "section 179 deduction." See IRS Publication 946 for information on how to do this.
- Supplies, postage, advertising, etc -- Those miscellaneous expenses do add up. Save your receipts or put everything on a credit card so you'll have a record of them.
- Travel, meals, and entertainment -- If you travel for business, you can deduct transportation costs, meals and lodging, tips, and even dry cleaning. Entertainment expenses must be justified, and even then you can deduct only half the expense.
- Insurance -- Premiums for liability or malpractice insurance can be deducted. If you are a sole proprietor and pay health insurance premiums, you can deduct 100% of the cost on your 1040 (not Schedule C).
- Interest -- Interest you pay on debts related to the business (including credit card interest) are deductible on Schedule C.
Home Office Deduction
Here's the one you've been waiting for. Yes, you can write off part of your rent or mortgage payments -- plus some other expenses -- by taking the home office deduction, if you qualify. The home office deduction is no longer a red flag to the IRS, but you DO need to document your expenses. It's a good idea to talk to your tax advisor before taking the deduction for business use of your home. Here are the IRS guidelines:
- You must have a room or area of your home that is used exclusively for business. If it's also a guest room, it doesn't qualify.
- You can deduct 100 percent of the expenses that are directly related to the business area, including painting, cleaning, or telephone or Internet lines dedicated to the business.
- You can deduct a portion of the indirect expenses that relate to the entire residence (rent or mortgage interest, property taxes, depreciation, utilities, insurance, maintenance and repairs). You can deduct the percentage of these costs based on the proportion of the business area versus your total home. Example: if you have a 2,000-square-foot home and operate out of a 200-square-foot-room, you can deduct 10 percent of your indirect expenses.
For more information, see IRS Publication 587, Business Use of Your Home (Including Use by Day-Care Providers).