Since the global pandemic changed the course of employment, home-based businesses became even more enticing for people who want to get out of the traditional working environments.
The idea of working right inside the comfort and safety of your home while still earning a lucrative income is one of the major bonuses of having a home business. It also helps that many laws were already written and passed to reduce the otherwise huge expense load for small to medium home-based businesses and self-employed persons.
When you have a home-based business, whether it is an e-commerce, digital marketing, or network marketing business, you are saving money that will otherwise go to tax. This is why even if you or your spouse have a full time office job, it's always a good idea to have a side-hustle from home to take advantage of business-related deductible expenses. In the United States, the IRS recognizes these costs through tax returns and provides many tax benefits for having a home business. So before you start filing your tax returns, we highly recommend that you take advantage of these tax benefits.
Here are the common home business tax benefits that you might be entitled to receive:
1. Home Office Tax Benefit
The home office tax deduction is one of the most common tax benefits that home-based business owners receive. It is also one of the more complicated tax returns to file.
Essentially, this deduction states that all the expense costs by your designated workplace at your house can be deducted under home office expense. These expenses cover a part of your overall utilities, rent or mortgage, related insurance costs, and repairs depending on your case.
However, you have to prove to the IRS that you have a specific space or room in your house that is solely dedicated to your business. That means a desk in your bedroom or your dining table set up as a working space won’t cut it. The IRS may ask you for the diagram of your house and your workspace as supporting documents.
The calculation for your home office tax deduction is directly proportional to the area of your working space. For example, if your workspace takes up 20% of your house, then your utilities such as electricity and water will be tax-deductible by 20%.
The same principle goes for rent or mortgage, home depreciation, insurances, and more. Specific benefits under this deduction depend on you either owning or renting the place.
2. Phone and Internet Bills
If you’re not claiming the home office tax benefit or you don’t qualify under it, you can still deduct some of your business-related expenses. Your fax, internet, and phone bills are all classified as business expenses.
However, there are limitations to this, especially on your phone bill. If you only use one phone line in your house for both business and personal use, then the IRS won’t allow you to deduct the cost of it even if you have an office at your house.
3. Self-Employment Tax Benefit
The self-employment tax covers your Social Security and Medicare taxes. The standard self-employment tax is 15.3% that is divided accordingly to cover your Social Security and healthcare.
If you’re working under an employer, both of you share the cost of the self-employment tax. So in your payslip, it will only show that you’re paying 7.65% of your total income and you’re indirectly paying your employer for the other half.
However, for those who are self-employed like home business owners, you have to cover the 15.3% self-employment tax. This will also change depending on your total income, if you’re married, or if you have dependents.
But as a home business owner, you’re entitled to a self-employment tax benefit, so you don’t have to pay for being your own employer. The IRS allows you to deduct 7.65% of your personal self-employment tax to your net income and declare it as a business expense.
It’s important to understand though, that this benefit won’t cut the self-employment tax itself. This deduction only applies to the calculation of your income tax.
4. Health Insurance Premiums
When it comes to paying your own health insurance premiums, the IRS provides tax benefits that will allow you to deduct your dental, health, and certain long-term care insurance premiums.
This coverage not only applies to you but to your dependents as well even if they’re not directly stated on your personal taxes. You can calculate your deductions for tax returns using the provided IRS Health Insurance Deduction Worksheet for self-employed persons.
5. Travel Tax Benefits
Business-related travel can qualify as tax deductions. But, you have to follow the guidelines and qualifications set by the IRS.
For your trip to be declared as business travel, it should be outside of your city and will last for more than a day that you need to arrange accommodations. The most crucial one is that you should prove that you have an important, business-related agenda to be done on your trip.
The IRS keeps a close eye on travel tax benefit claims because it’s one of the benefits that are mostly subjected to abuse. For you to fully claim the tax return from your travel, you have to have complete records and receipts of all your activities and expenses.
That includes your accommodation, transportation, and meals. The first two are 100% tax-deductible but your meals are only limited to 50%. It’s important to remember that lavish expenses will usually get rejected by the IRS.
If you choose to combine your business trips with leisure, then you can’t declare all the expenses for your tax return.
You’re only allowed to claim the tax benefit for your business-related costs. The same goes for if you have someone with you that isn’t your employee. You can only claim partial benefits amounting to the cost of your personal business expense and not your companion.
The actual tax calculation might be more complicated than what’s stated above so it’s highly recommended that you comb through the policies of the IRS. These tax benefits are only the tip of the iceberg for self-employed persons who own home business. The IRS includes so much more deductibles, but these are the most common ones that are typically used.
But if there’s a time that you’re unsure about whether to declare it for the purpose of tax returns, always go back to the basics and think if it’s directly related to your business! For a more comprehensive look at tax benefits, take a look at this book that my business coach highly recommend: https://amzn.to/3cgkQXI