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10 tax tips for owners of a home-based business

by Nellie Akalp  |  October 22/2013  |  ,

10 tax tips for owners of a home-based business

This time of year doesn’t necessarily feel like tax season, but the home stretch can be an important time for your tax strategy. After all, by the time you get around to looking at things in March or April next year, it’s too late to take any action for your 2013 return.

When you file taxes as a solo business owner, things are more complicated than those days when you may have a received a tax form (W2 in the US) from a single employer. However, you’ve also got plenty of opportunities to trim your tax bill.

To that end, here are 10 tax tips for the solopreuner working from home. Of course, as with any article you read, these are general tips and should never take the place of individualized advice from a tax accountant or CPA. As well, the examples shown are US-based, so check with your advisor on what comparable tips apply in your country.

1. Deduct your home office

To qualify your home office as a legitimate business expense, it’s got to be a place that is used exclusively for business activities. If your kitchen table doubles as your work desk, you won’t be able to deduct it. But, if you’ve got a dedicated room for an office, or even a portion of a room, you’ll be able to deduct some of your housing costs.

For example, Sarah, a graphic designer uses a spare room in her rental apartment as her office. The apartment is 1,900 sq. ft. and the office is 180 sq. ft. (9.5% of the total square footage). She’s able to write off 9.5% of certain home expenses including her rent payment and renter’s insurance. And if she painted the room, she’d be able to deduct those costs as well.

Note that starting in 2014 (for your 2013 returns), you’ll have a new, simplified option for claiming the home office where you don’t have to calculate a percentage. In this method, you can claim $5 per square foot of the office up to 300 sq. ft.

You may have heard that the home office deduction is a big red flag… and the IRS is more likely to audit the self-employed who take advantage of it. However, if you’re legitimately entitled to the deduction, take it. It can be one of your most significant annual expenses.

Form to know: Form 8829: Expenses for Business Use of Your Home

2. Home utilities

If you’re taking a home office deduction, you’re also able to deduct a portion of your utility bills—namely your monthly heating and electricity bills. In this case, you can deduct the same percentage as the rent/mortgage deduction described above. You can also deduct some of your broadband/Internet bill, but you’ve got to take into account that you most likely use your home broadband for non-work purposes as well. For example, Sarah deducts 50% of her monthly broadband bill as a business expense.

3. Office supplies

Don’t forget all the paper, ink toner, postage, paperclips, etc. that you purchase. These are all fully deductible (provided you can prove you’re using them for your business). How about your new computer or iPad? These can also be deducted. However, keep in mind that if you only have one tablet or laptop, then most likely you’re also using it for personal purposes as well. And in this case, you can only expense the percentage of how much the equipment is used for business (i.e. 50% or 60%).

Form to know: Publication 535 Business Expenses

4. Travel expenses

Did you attend a conference this year? Do you travel to meet a client (and aren’t reimbursed for those costs)? If so, you can deduct these expenses. Here’s what you need to know:

  • You can deduct any transportation costs (plane tickets, bus fare, taxis, airport parking, rental car)
  • You can deduct your lodging and tips
  • You can deduct 50% of your meals for business days

Also, keep in mind that if you have an out-of-town business day on Friday and one on Monday, you’re also allowed to deduct your lodging and meal costs from over the weekend too!

Form to know: Pub 463 Travel

5. Autos and commuting

If you’re working from home, you obviously can’t deduct any kind of daily commute—you also can’t deduct your morning trip to the local coffee house (no matter how necessary it might be!). But if you travel to meet a client, perform a job outside the home, purchase business supplies, conduct research, or do any other kind of activity for your job, you can deduct this travel. That includes a standard mileage deduction (or public transit fares), parking, and tolls.

Form to know: Pub 463 Travel

6. Taking a client out to lunch

Taking a client out to lunch is a time-honored tradition, but it also causes its fair share of issues tax-wise. First, you can only deduct 50% of the meal, not the whole thing. And perhaps more importantly, the IRS is going to be on the lookout for excessive or extravagant deductions. You’re going to run into trouble if you think you can fly a client to Barcelona for tapas or try to expense a $300 bottle of Cabernet with lunch.

Here’s what does work. Lucy, a PR professional, brought her new client to lunch to finalize their contract. The meal came to $74 including tips and taxes, so she was able to deduct $37 as a business expense. Lucy kept the receipt and on the back, jotted down the date, the client’s name, as well as a few notes on the business matters discussed.

Form to know: Pub 463 Entertainment

7. Upgrade your office

If you’ve been thinking about a new desk, office chair, bookcase, task lamp, or other office furniture, keep in mind that these are all allowable deductions. Trying to expense a new painting might be a stretch, unless you bring clients to your home office. There are two ways to claim a deduction: all at once in the year when you made the purchase or gradually over the life of the property (known as depreciation deductions).

Form to know: Pub 946: How to depreciate property

8. Your health insurance

Self-employed individuals (including sole proprietors) may be able to deduct the cost of health insurance for themselves and their family. However, you can’t deduct your insurance for any time when you’re able to participate in an employer-subsidized plan (i.e. through your spouse or partner).

Form to know: Publication 535 Business Expenses

9. Retirement plan

I know that for many small business owners and freelancers, especially those who are just starting out, the monthly cash flow can be tight and you’re thinking more about the present than the future. However, stashing away money in a tax-deferred retirement plan is one of the best ways to lower your taxes. I encourage every small business owner to at least set up a plan, even if you’re just contributing a bare minimum at first.

Form to know: Retirement plans for self-employed people

10. Business structure

If you’ve ever filed taxes as a sole proprietor, then you understand that you’ve also got to pay self-employment taxes. Forming a corporation or an LLC (and then making what’s called an “S Corp Election”) might help you reduce your self-employment taxes. That’s because with an S Corporation, you can pay yourself a “reasonable salary”; any remaining profits can be taken as a profit distribution (and these aren’t subject to self-employment taxes).

For example, Jackson is a mobile app designer. As a sole proprietor, he made $95,000 last year and had to pay self-employment taxes on the whole amount. This year, he formed an LLC and filed for S Corp election. His business brought in $130,000 in revenue. He paid himself the going rate for an app designer (this was subject to self-employment tax); then, he gave himself a distribution from the remaining profit (and this was not subject to self-employment tax).

Final thoughts

If you have any questions or concerns, it’s always best to consult with a tax professional. They’ll make sure you’ve crossed all your t’s and dotted your i’s. When it comes to taxes and the IRS, you never want to stretch the rules. However, you should make sure you’re taking all the deductions that are legally allowed to you. After all, large corporations have legions of tax advisors helping them get the lowest tax bill possible. There’s no reason you should have to pay more than you’re supposed to.

About the author: Nellie Akalp is the CEO of CorpNet.com, an online incorporation filing service, where she helps entrepreneurs Incorporate, Form an LLC or File a DBA for their businesses. Connect with Nellie on Google+

For Nellie’s advice on “Doing Business As” — what it is and why you might need it — pop over here.


  • lionel1

    Your post about “tax tips” was a very interesting
    post and just what I needed. Thank you for taking the time to share it with us.
    Your work is really appreciated.

  • Holly Ares Snyder

    Every one of these “how to do taxes as a self-employed’ articles I read, I feel like I get just a bit closer to understanding the magic my CPA works behind the scenes. But still, my number one tax tip for small business owners is: PAY SOMEONE ELSE TO DO IT.

  • Pierce Ujjainwalla

    Post a Canadian version of this please, would be helpful.

  • Abbas Hyder

    The difference between Canadian version of this document is only in section 8 & 9. In Canada, health premiums are usually a credit for everyone regardless if they have business or not. If a business has more than 2 employees, then the premiums paid on behalf of employees can be deducted from its business income. As for retirement plan contributions, they are always deductible regardless of whether one has a business or not. Any contributions made by the business on behalf of its employees can be deducted from the business’s income.

  • Donald_FreshBooks

    Abbas, thanks for the guidance!

  • Donald_FreshBooks

    Abbas Hyder has added a comment with some guidance for Canadians. Check out his comment on this post.

  • Monique Lusse

    really good stuff! Thanks for explaining it in such a clear and complete manner.

  • Kenneth Hoffman

    I tell my clients, “you think hiring a tax expert is expensive, try using Turbo Tax”.

  • Paul

    Hi this is great but reading this from the UK I don’t quite know which country rules you’re referring to! I’m guessing the US by the comments and so would be great to see a UK version or a clear tag or category to show which country this relates to! I’m sure I could do a UK version for you!

  • Donald_FreshBooks

    Hi Paul. Yes, the example are US-based. Feel free to add what tips apply in the UK in the comments here. Our UK readers would appreciate that!

  • gul muhammad

    This is a great and very helpful article.

  • rebecca allen

    If you use Turbo Tax, you better have a great understanding of the tax code. There are many errors and multiple ways to trip up unless you really know what you are doing.

  • http://www.racicot.net/ www.racicot.net

    Good information, thank you

  • Harish Athotra

    Hi all

    This in reference to our previous post at the this forum regarding working as Medical tourism Facilitator IN Nigeria.We have already email you all the details through your email. Further if you any queries/questions please don’t hesitate to ask. Now once again we would like to enlighten you all to gain more knowledge about the project.

    What is medical Tourism?
    When a patient is willing to visit a different country to get treated for his/her disease. This process of getting treatment from a different country is called Medical Tourism 

    What is a medical facilitator?

    A medical facilitator is a representative of patients who coordinates with Medical Tourism Company in in different countries regarding the treatment of the patient and send patients to their destination(India) for their treatment. 
    You will play your role by coordinating with the patients and Medical tourism Company and will be offering all the facilitating services to the patient.

    Why India as a Destination for Medical Tourism?

    “First World Treatment at Third World Costs”
    A combination of three key factors – quality, availability and cost has been key factors in fuelling the phenomenal growth witnessed in the Indian medical tourism industry. India is a leading player in the medical. It is increasingly emerging as the destination for medical tourism for a wide range of medical facilities for foreign patients. There are numerous advantages of coming to India for treatment for foreigners. Some of the advantages of coming to India for medical treatment are

    World Class Quality
    Personalized Services
    Less Waiting Time
    Low Cost
    Rich Cultural Heritage

    What will be role of yours and mine?

    Yours 
    you have to market yourself in your local area and look for patients who willing to get treated from abroad. Interact with them get full information about them. Collect medical history, reports from the patient. Prepare a case and forward it us.

    Mine 
    I will takeover the case forward to concerned country and hospital as per patients choice. Currently im in india i would prefer we can start with India

    W already have contacts with all major hospitals in New Delhi (Capital of India)
    what will be my services?
    Complete Medical assistance
    Medical Consultation from doctors and hospitals before coming to India
    Personalized tailored 
    packages 
    Pre and post treatments care & assistance
    Dedicated Guest Manager for 24X7 Support
    Visa Assistance for patient & family members
    Airport Pickup & Drop Services
    Hotel Reservations 
    Post treatment Care
    India Tourism Services
    Air Ticket Reservations
    Relaxing Tour Services
    Payment Options: Foreign Currency Exchange, Wire Transfer, Credit Cards, Cash

    What will be your profit.?

    This system is totally based on reference, you will earning 5% commission on each referral. This percentage will be calculated on total treatment cost of the patient excluding the cost of consumable services. 
    For Example:-
    If a treatment cost for patient is 10,00,000 Indian national rupees
    your commission would be 50000 Indian national rupees
    which is around 112000 Nigerian currency approx.

    If no. of cases are increased in one month percentage of commission will be increased. You don’t have to invest anything. you have to start marketing for your social circle or anything you like and look for patients who are interested in getting treatment from abroad.

    If you are interested please let us know i can forward you copy of contract so that go through full terms and condition between each other.

    Types of medical surgeries and treatment we cater:

    Cardiac/Heart Treatments
    Cosmetic Surgery
    Orthopedic Treatments
    Endocrinology 
    Dentistry
    Ear & Hearing Aids 
    In Vitro Fertilization 
    Stem Cells & Immunotherapy 
    Endocrinology 
    Physiotherapy & Rehabilitation
    Spine Surgery
    Gastroenterology

    If interested please provide your email address to start the process

    Thanks
    Harish Athotra
    +919873073334
    athotra@yahoo.com


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