Working from home has a lot of benefits, one of which is substantial tax savings. And although filing your taxes might be complicated in the beginning, nonetheless you need to learn how to do it properly. Whether you work from home as a freelance writer, designer or a business consultant you should be aware of the things that you can claim on your taxes that will allow you to be able to decrease your taxable income as much as possible.
#1 Tracking Expenses
First of all, you need to keep track of your business related expenses and business income throughout the year. This way you will be able to know what to deduct later. Arrange your income and expenses by month and keep it all together preferably in a software program like Quickbooks but a spreadsheet will work fine if you don’t do much in the way of invoices. This will also help you track your business spending and thus determine your net income for personal budgeting purposes.
Bear in mind that it is easy to under report or over report your expenses if you’re a freelancer. That is why you need to be very accurate when you track your expenses. You can claim any bona fide business expense as long as you have the necessary papers documenting it as business expenses. But there is some confusion as to what can be classified as ‘business expenses’. Obviously, it must have a connection to your business activities.
For example, if you need to rent an office or go on trips to meet with your partners, those are obviously business expenses. However, if you don’t rent an office and work from home you can still claim certain expenses as well. But you must meet certain requirements.
According to the IRS:
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. The home office deduction is available for homeowners and renters, and applies to all types of homes, from apartments to mobile homes. There are two basic requirements for your home to qualify as a deduction:
1. Regular and Exclusive Use.
You must regularly use part of your home exclusively for conducting business. For example, if you use an extra bedroom to run your online business, you can take a home office deduction for the extra bedroom.
2. Principal Place of Your Business.
You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities. For a full explanation of tax deductions for your home office refer to Publication 587, Business Use of Your Home.
Other Self-Employed Expenses
Don’t forget about your expenses on website maintenance: hosting, SEO solutions, content writing or webdesign. Advertising expenses, fees for consulting, business cards, anything connected to your business activities should be included on your tax form.
Do you use your car for business purposes? In this case you might be able to deduct car-related expenses. The IRS says: “If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. You can deduct the cost of round-trip transportation between your qualifying home office and your client’s or customer’s place of business.”
If you use your car for business purposes, you ordinarily can deduct car expenses. You generally can use one of the two following methods to figure your deductible expenses.
- Standard mileage rate.
- Actual car expenses.
But if you use the same car for both business and personal purposes, you must divide your expenses based on actual mileage. All you need to do is to keep track of receipts and mileage an easy way to do this is through an application on your smartphone. You might be able to deduct 50+ cents per mile if you keep your automobile log in a proper way. (You may also be able to deduct your smartphone as a business expense if you have another phone for personal use).
Note: The standard mileage rate changes every year. For 2011, the standard mileage rate for the cost of operating your car for business use was 51 cents per mile before July 1, 2011. After June 30, 2011, the business mileage rate increased to 55½ cents per mile.
At the same time, if you need to take a plane in order to meet your client or attend a conference, keep your ticket receipt for the tax related purposes.
Business expenses are the cost of carrying on a trade or business. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. See IRS: Self-Employed Business Expenses for more information.
Also you might consider hiring a tax resolution preparer who knows about self-employment. His services are extremely valuable especially in your early self-employment years as he should be able to give you important insight into what is deductible and what is not, often saving you more in taxes than his preparation fee.
The IRS has a Virtual Small Business Tax Workshop composed of nine interactive lessons designed to help new small business owners learn their tax rights and responsibilities. Lesson #2 helps you set up a system to track your income and expenses. And lesson 4 addresses specific issues related to a home business.
Image courtesy of Stuart Miles / FreeDigitalPhotos.net
See Also:
- Tax Deductions for New Parents
- What You Need to Know About Deducting Travel Expenses
- Top 5 Personal Money Management Software Programs
- Understanding the Deduction for Charitable Donations
- Avoid the Hassle of an IRS Audit
More Self Employed Resources:
- The Complete Guide to Working for Yourself: Everything the Self-Employed Need to Know about Taxes, Recordkeeping, and Other Laws (Book & CD-ROM)
- The Money Book for Freelancers, Part-Timers, and the Self-Employed: The Only Personal Finance System for People with Not-So-Regular Jobs
- 475 Tax Deductions for Businesses and Self-Employed Individuals: An A-to-Z Guide to Hundreds of Tax Write-Offs