Working from home is often considered the ultimate dream but it comes with a whole other set of tax concerns. Now that you are self-employed your taxes are higher because you have to pay self-employment tax on top of income tax. How do you combat these expenses? You can deduct your home expenses as business expenses to bring your taxes down to a manageable level.
To qualify for using your home expenses as deductions for your home business you must:
- The part of your home that you use for business must be used exclusively and regularly used for your business. Take pictures of your home office once every few months to show your accountant to assure him/her that it is used for business.
- Your home must be your principal place of business where you meet or speak with your clients. It can be a separate structure not attached to the home but still on your property. Again take pictures or have your spouse take pictures of you dealing with clients.
You passed the test now what can you deduct?
- The biggest deduction for those who work at home is their mortgage or rent. The easiest way to figure out how much to deduct is to use this equation: total square footage of your office / total square footage of home * 100 = % of your payment you can deduct.
- Most other expenses (such as utilities insurance phone use repairs security systems and mileage) are subject to the same rule of calculating the percentage that you use for your business from your total bill.
- If you own the home you use for business you can also deduct the depreciation of the wear and tear of the area you use for said business. To learn more about this talk to an accountant and keep track of all expenses before and after the month you started using the home as part of your business.
The most important thing to do to make sure you get the deductions you deserve is to keep track of everything. Even a $4 stapler qualifies for a deduction and will reduce the amount of taxes you pay. Furthermore keep all of your information organized and easily accessible to you and your accountant. It will make your life easier and your business more profitable.