Having a home business definitely gives you some tax advantages. Home business deductions are a wonderful way to recoup some of the costs from business expenses and they can also offset the cost of any taxes owed. Before going hog-wild with deductions, it is important to properly understand which deductions are valid and which deductions may raise an audit flag.
Should I deduct the portion of my home I use for my business?
This is the one of the most perplexing home business deduction questions, because it can be quite complicated and there is a lot at stake. It is definitely an option to write off a portion of your home if you use it for business. However, the space you write off must be used exclusively and regularly for business. This means an office which serves as your place of business during the day, but a family computer room at night will not qualify for a deduction according to the IRS rules. Additionally, deducting a portion of your home means you fill out Form 8829 to calculate the deduction, but this form is typically a red flag for IRS auditors and could increase your chances of an audit.
If you choose to deduct a portion of your home, make sure you have all your ducks in a row and have detailed reporting to prove your deduction.
Now that I’m self-employed, can I write-off my car as a business expense?
If you are self-employed, you can deduct at least some of the cost of your vehicle, even if you also use it for personal use. These expenses could include fuel costs and maintenance, and are usually best calculated by using a per-mile cost, which the IRS updates on a regular basis. As with all self-employed tax deductions, the key is to keep clear records and differentiate between business use and personal use. There is always the handwritten logbook as an option, but my favorite is an electronic tracking device, like CarCheckup. The tracking device is about $150, but automatically tracks and then uploads mileage summaries right to your computer via USB.
What type of expenses can I write off?
There are many different expenses a business can deduct. Probably more than you think. In order to avoid giving the government money that is rightfully yours, carefully review a list of possible deductions for those who are self-employed.
One thing to be careful of, however, is trying to write-off an entire expense as a business deduction when it is only partially used for business. For example, if you purchase a new computer for your business, but also use it for personal things like photos, music and games, you will need to keep track of your business use and deduct only that percentage. Another area is your cell phone. If you use your cell phone for both business and personal, you will need to track what percentage of your time is used on business calls vs. personal calls.Can I write off my health insurance payments if I have an individual insurance policy?
If you are self-employed and pay for your own health insurance, you are able to deduct the full cost of your health insurance premiums as a personal deduction. It is important to note that in order to deduct your health insurance expenses, you must have a net profit from your business. If you breakeven in your business or experience a loss, you are able to still deduct your health insurance premiums on a Schedule A as a medical expense rather than on the 1040 Form.
Do I need receipts for all my deductible expenses or can I use credit card statements as proof?
Keeping receipts are important because you may need them in case of an audit. What if you didn’t keep a good collection of business receipts? The burden of proof on any business expense deduction will be the "Four Ws": Who, What, Where and Why. If you can prove this with various other means, like a car log and credit card statement the IRS may accept it. But it is all up to the IRS. The most bullet proof way of proving an expense is with a receipt and a note detailing the Who, What, Where and Why.
If you have additional tax questions, consider using these other resources:
- Top 5 Self-Employed Tax Questions
- Top 5 Self-Employed Tax Return Audit Questions
- 15 Self-Employed Tax Deductions
Disclaimer: I am not a tax specialist or licensed tax attorney. The information provided here should be used as a general guide. For specific questions about your own taxes, please consult a tax specialist or refer to the official IRS publications.
