To achieve a balance between the tax benefits of corporations, self-employed taxpayers now have a new deduction that helps small businesses pass their income (when the individual tax rates are applied).
Individual owners, corporations or S corporations can deduct up to 20% of the QBI, although there may be limits and while some definitions of terms are in clear code.
This deduction became effective as of January 1, 2018, so you can claim it for the first time on your return when you file this spring for the 2018 fiscal year.
2. Deduction From the Home Office
This is a main area of focus for tax deductions for home based business.
You can still deduct an office at home as long as it is your primary place of business, used on a regular basis, and used exclusively for non-business purposes.
Eligibility details and how to calculate your deduction are published in IRS 587, “Commercial Use for Home.”
3. Retirement Plans
If you use a 401k, a simplified employee pension (SEP) or other appropriate retirement plan, you can deduct your contributions for that plan.
Not only will you get a valuable tax deduction, but you will also save for retirement by growing a nest egg tax.
The IRS provides details of contributions and deductions based on your preferred plan.
4. Office Supplies
When you buy office supplies (non-capital expenditures) just for your business, they can be considered as standard business and deduction costs.
Capital costs (with a useful life of more than one year) can also be deducted through depreciation if they are used to generate income for your business.
Depreciation can be applied to both domestic and commercial equipment.
For more information, see IRS publication 946, “How to depreciate property.” The new tax law increased the depreciation limit to $ 1 million and the depreciation rate from 50% to 100% in the equipment purchased and in service after September 27, 2017.
6. Education Costs
Do you attend relevant seminars for your home based business?
Do you take continuing education classes or do you maintain subscriptions and obligations in relevant professional societies?
If these costs are related to your profession, they can be deducted.
7. Health Insurance
Health insurance is often a challenge for self-employed workers.
You may be able to reduce the burden by deducting premiums for yourself and your family if you meet the criteria set forth in IRS Publication 535, “Business Expenses.” Note: There are new tax laws for health insurance as a cost saving exercise so speak with a tax expert.
8. Communication Costs
Expenses, such as Internet services and data, can be deducted in any proportion related to your business.
Basic local telephone services are not deductible for the first telephone line in your home, even if you have a home office.
The long distance commercial calls in this line are deductible, as are the costs of separate lines used for a company.
9. Other Travel Expenses
Some business travel expenses may be 100% deductible if they arise from your fiscal domicile and are considered “normal and necessary”.
If you travel for business and it is part of building your home based business you can deduct the costs.
The new tax law eliminated certain entertainment costs, but the 50% deduction on food and beverage costs still applies.
10. Promotional Costs
Advertising costs related to the business, from the general promotion of the route to the simple deductible business cards.
Promotional gifts can be deductible as long as they are marked with your business brand.
11. Bank Charges
If you are careful to separate your commercial bank account from your personal accounts and maintain a clear line between transactions, you may be able to deduct some bank charges associated with your business account.
12. Interest commissions related to the business
As with bank charges, you can deduct interest on credit card balances and loans closely related to your business.
Be sure to keep excellent and thorough records to create the distinction.
The new tax law creates limits on interest deductions for large companies (gross income above $25 million), but, as a small business, deductions should not have an impact on your interests.
Do you use your car for commercial purposes?
You can take a standard mileage deduction (54.5 cents per business mile associated with fiscal year 2018 and 58 cents per mile by 2019) or a deduction based on actual costs such as fuel, maintenance, licensing and depreciation.
You can also deduct some public transport costs.
Be sure to keep personal and commercial mileage costs separate, save all necessary receipts and keep good records as proof of commercial use. (See pattern here?)
14. Contract Labor Costs
You can hire other independent contractors to provide services, for example, a contract with a web developer to create your website.
Outsourcing and freelance costs are a big one for tax deductions for home based business.
These costs are generally deductible.
15. Tax and Accounting
You can also deduct the cost of the tax preparation services used for the business part of your business-related statement.
Claiming costs for tax software like Freshbooksis also tax deductible.
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