As the year winds down, it’s a good time to start organizing your finances and determining whether or not you can squeeze in a few tax breaks. Even if you don’t get any new tax breaks, it’s a good time to consider reviewing your business spending throughout the year to see if what you’ve done qualifies you for business tax breaks.
Here are 7 tax breaks to familiarize yourself with:
- Home office space
If you have a dedicated home office space, you can deduct that on your taxes, whether you have bought your home, or whether you are renting. Figure out the percentage of your home that your office space takes up, and use that to calculate your costs.
For example, my home office takes up about 40 square feet of space in one room of my apartment. My apartment is 1350 square feet, so my home office accounts for about 3% of my living space. I can deduct 3% of my rent and utilities as my home office tax deduction.
There are also new rules that allow you to take a home office tax deduction of $5 per square foot. Run the numbers to see what works for you. In my case, taking a $200 tax deduction using the recent rule offers me a bigger tax break than using the percentage method. If you have a small home office space (like I do, since I can’t deduct the entire room because we use a portion of it for storage), you might be better off with the flat rate deduction.
- Business loan interest
Dave Clarke, part of the team at Kashoo, a cloud accounting app for small business, points out that you can deduct interest from a business loan on your taxes. Business debt is one of those types of debt that the government encourages (along with student loans and mortgages) by offering a deduction on interest you pay.
Remember, too, that a “traditional” small business loan from the bank isn’t your only option when it comes to deducting interest. “If you have a business credit card, its interest is a write off,” Clarke points out.
- New equipment
I recently bought a new desk and chair for my home office. I will be able to deduct the cost of this equipment from my business income. Other types of equipment are also tax deductible. If you buy a new computer for your home office, or if you have special equipment you use in your business, you can receive a tax deduction for those items. If you need certain equipment to perform at your business, you can deduct it on your taxes.
- Accounting and payroll costs
Clarke points out that you can also deduct accounting and payroll costs from your taxes. If you pay for someone else to take care of your bookkeeping, you can deduct that. “If you’re paying $5 per month for accounting software, that’s a $60 write off,” Clarke says.
It’s also possible to deduct the cost of tax preparation. I regularly receive a tax deduction for the cost of having my accountant pay my taxes. Additionally, if I consult with my accountant about my business structure, or about business planning, the fees I pay can be deducted. You can also deduct legal costs related to your home business.
- Cost of goods sold
I don’t have to worry about inventory because my home business is based on my writing services. However, there are plenty of home business owners that sell goods. These business owners can deduct the cost of their goods. Whether you buy inventory to resell, or whether you buy supplies and then build your own items to sell, you can deduct the cost of your goods. This can provide you with a good way to offset some of the costs of doing business.
- Online costs
Many home business owners use the Internet to conduct business. I know that I haven’t done any business offline in several years. As a result, you can deduct your online costs when it comes to your business. Clarke lists some of the online costs you can deduct as a home business owner:
- Web hosting
- Web site design and development
- Email marketing
- Google Apps
- Online advertising
- Software and business apps
Take a few minutes to consider your situation, and what you pay for online. You might be surprised to discover that your online business attempts are tax deductible.
- Virtual assisting
A couple years ago, I began hiring a virtual assistant to take care of some of my more mundane tasks (social media comes to mind). What I pay her is tax deductible in terms of my business. She is a 1099 independent contractor, so I have to issue her a tax form every year, but that usually isn’t a problem. Make sure that you get W-9 forms from your contractors so you have the information you need to fill out a 1099 form.
Don’t forget that you can also pay others in your home business. My son does office administration tasks for me. I use a W-2 for him, though, so that he can contribute a portion of his earnings to a Roth IRA.
A number of costs are tax deductible, as long as they are strictly business expenses. From trade subscriptions to a portion of your Internet costs, you can reduce your taxable income from your home business with a little planning. Make sure to document any expenses you have, and consult with a tax professional to make sure that everything is in order.