Working from home can be extremely convenient and cost effective. Whether you are doing it because you have your own small business, or at the preference of your employer, working out of your house or apartment may render you eligible for many tax deductions. Here are five work-from-home deductions that are definitely worth checking out – if you qualify:
1. Home Office Deduction
This is probably the biggest and most sought-after deduction of the bunch. A home office deduction can save you a lot of money on your mortgage or rent. In order to qualify for a home office deduction, a part of your home must be used exclusively and regularly as your principal place of business. It can be very tempting to take advantage of this deduction, but it’s important to follow the rules closely.
For example, if you work from home and use a coffee table in the living room as a home office, that room is not tax deductible. However, if you dedicate a whole room just to work, then that room is deductible. You can also only claim a home office deduction if you are self-employed, or if your employer doesn’t provide you with a workstation in their office. The IRS has recently changed the rules for this deduction, making it easier and less time consuming to calculate. The new method, known as the “safe harbor method,” can be used by deducting $5 per square foot, and is capped at $1,500 or 300 square feet per year. However, you can always calculate it the old way, if you think you use more than the capped amount. When filing these deductions, use Form 8829 to figure out the amount, and then report it on Form 1040 Schedule C.
2. Utilities & Home Expenses
The use of utilities could be tied in with your home office deduction; so too can repairs or other remodeling expenses be deducted from your taxes. However, it is important to note that this deduction is directly related to your home office deduction above. The percentage you can deduct from your utilities and home expenses is the same as your home office. Furthermore, if you use the safe harbor method mentioned above, you cannot deduct other house-related expenses, except for mortgage interest and real estate taxes. In order to determine which method to use when filing with the IRS, it may be worthwhile to calculate the amount that your home office’s square footage would allow you to deduct, along with the cost of your utilities and other home expenses.
3. Business Supplies
Business supplies – even computers – are deductible on your taxes, provided that they are used for your business operations. Pens, notebooks, filing cabinets, and other office materials are all eligible, and these expenses can be deducted regardless of whether or not you use the safe harbor method for a home office deduction. Over the course of a year you can end up saving hundreds or even thousands of dollars, depending on your work-related expenses. Remember to save every receipt, and if possible use account programs like Quicken for easy and reliable record keeping.
If you primarily work from home, but constantly have to take meetings around town with clients or customers, some costs related to your vehicle are tax deductible as well. Expenses like gas and regular maintenance are necessary for your business, and thus can be deducted. Although it may be tempting, it’s important not to take undue advantage of this write-off and run the risk of an audit. Only claim expenses when you are actually using your car for work. If you can afford it, and have the space, having one car purely for business can make the separation much simpler.
5. Miscellaneous Expenses and Fees
During the course of operating your home business you may find that you’d rather take meetings at a café or other public space. The money spent at these places can also be deducted from your taxes. Always keep records of these expenses, as well as the receipts to back up the claim. Detailed memos to yourself on what each receipt was for are very important in case the IRS requests tangible evidence of these deductions. Other fees such as website registration or receiving large amounts of money through Paypal can be deducted as well.
When assessing your deductions and expenses for your work-from-home business the most important rule is to have the paper trail to back it up. All of these deductions are reported on Form 1040 Schedule C. Keep in mind that your deductions cannot be greater than your profits, but can nullify them. What this means is that you can’t claim that you have a negative profit of $1,000, but you can claim that you made a profit of $0. When in doubt about any of the items listed above, consult a tax advisor, and consider having them prepare your taxes. They may have even further insight into more ways you can save, and using the service is tax deductible as well.Sara Collins is a writer for NerdWallet. She is committed to finding every way for entrepreneurs and small-business owners to save money, from obscure deductions to the tax benefits of 529 plans.