Top Tips for Home Based Business Tax Deductions

Small business owners could be losing money at tax time. Keep in mind the fact that these tax tips are generic, please seek specific personal advice from a qualified accountant.

9 Tax Tips for Work at Home Business Owners

You probably already know that filing taxes for a home-based business is quite a stretch from filing with a single W-2 form. When you run a home-based business, preparing your taxes becomes a much more complex and multifaceted state of affairs. However, this also means that you have many opportunities at your finger tips for whittling down how much you owe in the end.

These are 9 simple, yet effective tips you can use when preparing to file your taxes. Keep in mind that these are basic tips, and you should always prioritize specific advice from your CPA or accountant. Filing taxes is a situational process, and it's advised that you always keep your realistic situation in mind when using generalized advice.

1. Include Your Home Office in Your Deductions

It often goes over many business owners' heads, but a home office that is used exclusively for work can be counted as a deduction. Of course, if your living room couch doubles as a work area, you likely won't be able to count it as a deduction. However, if you've designated a particular room or area for strictly work, particular housing costs will be eligible for deduction. Specifically, this means you'll be able to write off a small percentage of expenses such as monthly rent payments or home/renter's insurance.

Likewise, your home utilities and office supplies can be deducted. A small percentage of your electricity / heating / internet bills will be eligible for deduction, and you can completely write off work-related supplies such as paperclips, paper, sticky notes, postage, ink cartridges, etc. Even your work computer or iPad can be deducted. Keep in mind that this is all highly dependent on whether or not you can prove that these items are used for work-related purposes.

2. Account for Every Travel Expense

Take a moment to think about the amount of business-related trips you take in a year. This includes travel to conferences, meetings with clients, etc. Now, think about any related costs such as taxi fare, airport parking, hotel lodging, meals, etc. All of these expenses that are directly related to your business travel can be deducted. To receive each deduction, keep each and every receipt that you are given.

On the back of each receipt, jot down details that pertain to the purchase. For example, you might make a note on a lodging receipt from a hotel that you were in town to meet a client. Write the name of the client, what was discussed during the meeting, and what the two of you did while together. This will make it much easier for your tax accountant to deduct the expense at the end of the year.

3. Deduct Appropriate Meal Expenses

Of course, you won't be able to deduct each and every meal that you have. However, business-related meal expenses are deductible by 50%. This means that if you take a client out for lunch and end up spending a grand total of $64.50 (including the tip), you can deduct roughly $32.25.

It's extremely important to remember that the IRS actively searches for suspicious activity and excessive deductions. In other words, once the end of the year rolls around, you likely won't be able to deduct a $200 bottle of Pinot Grigio that you shared with a client over lunch. If you want help with your deductions, keep things simple and always write down a few details about the meal on the back of the receipt. For example, write down who you met with, as well as the matters that were discussed.

4. Keep Your Health Insurance in Mind

If you're operating a home-based business and simultaneously receiving health insurance, you might be able to deduct the costs of the insurance during tax season. Keep in mind that this doesn't apply if you're receiving coverage (or are eligible to receive coverage) via a spouse's/partner's employer-subsidized plan. Talk to your tax accountant to weigh out your options.

5. Go for a Tax-Deferred Retirement Plan

Operating a home-based business is a tough gig, and for those who are just getting their toes wet, cash flow is probably extremely tight. This means that it's probably seemingly unfeasible to start up a retirement plan. However, what you might not know is that storing money in a tax-deferred retirement plan can significantly lower your tax bill at the end of the year. Even if you can only contribute a small amount at first, it's highly recommended that you start a tax-deferred retirement plan as soon as possible.

6. Double Check Your Business's Entity

The reason many business owners miss out on particular tax opportunities is solely because their businesses' entities are incorrect. If you've expanded past the state of a home-based business, update your entity to reflect this. Likewise, if your business still isn't official, now is probably a better time than ever to change this. Register your business within your state, and ensure that you utilize the help of a tax professional when doing so to ensure you choose the right entity.

7. Actively Avoid Audits

Many home-based business owners dread the end of the year and merely hope that they aren't audited once that time comes. The best way to avoid audits is to actively prevent them. This means that you'll need to completely audit-proof your business and its processes. The way you do this will heavily depend on the type of business you're running. For example, you might need to begin keep record of your mileage, calendars, or personal use logs depending on your business type. Your CPA or tax accountant will be able to provide a wealth of information about how you can avoid audits whilst operating your specific type of business.

8. Choose the Right Tax Professional

You see a dentist for your teeth and an optometrist for your eyes, so why wouldn't you use the help of a specialist for your taxes? It's extremely important to not only find someone with experience in organizing business taxes, but also organizing tax filing for your type of business. Using an experienced tax accountant will help you avoid countless missed deductions, as well as save you the time and effort of attempting to learn tax law. As far as your home-based business is concerned, it's strongly recommended that you forego the DIY tax software and leave the matters to a professional.

9. Managing Your Taxes is a Year-Round Effort

Lastly, never forget that your tax matters are important during all parts of the year. Unless your business operates on a seasonal time frame, you'll need to stay on top of your taxes virtually at all times. It's strongly recommended that you not only implement strong tax strategies and procedures, but also hire a knowledgeable and experienced tax accountant.

For simple tax situations, it's quite okay to manage taxes once per year. However, a home-based business requires year-round tax management. This is what will help you discover missed deductions, avoid costly mistakes, and pay as little as possible once the end of the year rolls around.

Tax Saving Tips for Home Based Business Owners

Working from home, starting a home business and getting away from the daily nine to five grind is more common than ever before. The majority of those leaving the work force are finding opportunities like network marketing help them live, work and exist on their own terms. New networking marketing business owners often have a group of other marketers to support and teach them how to run their new business. This increases their chances of long term success and makes the transition easier. Regardless of what kind of home business you choose make use of the tax benefits available to you.

Form an LLC or Corporation

Instead of operating your business as a sole proprietor, you might consider forming an LLC or a corporation. Using the S-corporation, you can legally pay yourself a reasonable salary. Any remaining profit can be taken as profit distribution, which is not subjected to self-employment taxes.


Putting money away into a tax deferred retirement plan can lower your tax bill significantly. When you work from home, it's easy to keep as much money as you can for daily living expenses, but putting a little money into a retirement account is one of the best things you can do. Not only will you save on your taxes, but you'll be building an income for the day you stop working as well.

Health Insurance

If you are not eligible for health insurance through a spouse's employer, you may qualify for a deduction on the cost of insurance. This is available to business owners who are single, and those covering family members on their plan.

Office Furniture, Equipment and Supplies

Standard office supplies like paper, pens, staples and folders can be included here. Office desks, chairs and shelving are also acceptable for this deduction. The basic rule is that if you need it to run your business, you can deduct it from your taxes. There are specific rules regarding equipment and furniture that you need to understand. You can only deduct based on the depreciation value of the equipment you're using and not the entire cost of the purchase. Likewise, to claim a computer as an equipment deduction, it must be used for business only. If you use the computer for personal entertainment and for business, it doesn't count as a business expense.

Business Lunch or Dinner

As with most deductions, you can claim some food expenses as business related. If you just go out to eat because you're hungry and need a break, that doesn't count. If you meet a client for lunch, and you cover the tab, that does count. You can claim up to 50 percent of the total meal as a business expense on your taxes. This is one of the most abused tax deductions, which means the IRS is looking for extravagant purchases that may not be necessary for maintaining your business. Keep good records and notes about every business lunch and dinner so that if there are any questions, you have the necessary answers.


If you work from home, you don't have standard commuting expenses, but there are some exceptions. If you meet a client for lunch, you are commuting for business. If you drive to a business related seminar, you can deduct that. The same goes for travel required to purchase office supplies, equipment and furniture. The IRS uses a standard mileage allowance to determine what portion of commuting expenses can be deducted.

Travel Expenses

Any travel that you do for business purposes can be deducted from your taxes. This includes airfare, gas costs if driving, conference prices, hotel expenses, rental car expenses and food. You can only deduct expenses that are necessary for work activities. Due to the amount of abuse over the years, the IRS will look at any extravagant expenses as possible abuse of the system, and only 50 percent of your food expenses can be taken as a deduction.

Educational Expenses

The cost of professional seminars, college courses and that business training courses are tax deductible. If the educational course increases your skill in some way that will improve your business, you can take this deduction. Examples include: certification courses, business management courses and computer training. The main thing to keep in mind is that any expense for education must directly impact your business in some way.

Home Office

If you use your home office exclusively for business, you can take the home office deduction. When you take this deduction, you are using the business percentage value, which allows you to deduct a certain percentage of your mortgage, property taxes, insurance, rent and utilities. If you make repairs to the office space, you can also deduct these. There are two ways to calculate your home office deduction.

Traditional: This formula uses the total square footage of the office in relation to the total square footage of the home to determine a percentage of space the home office occupies in the home. For example, your home is 1250 square feet and your office is 250 square feet. Your home office percentage would be 20 percent.

Simplified: The IRS created a simplified method for claiming the home office deduction. Some people claim that you don't get as much in savings using this method. If you're not concerned with getting every penny from your home office deduction, then this method may work well for you. Using this simplified method, you would take a five dollar deduction for every square foot of your office space. The trick here is that the simplified calculations max out at 300 square feet.

Other tax deductions such as the start up cost deduction are more complicated. If you took a business loss during your first year, it may be worth it to look into this. Home business taxes can seem overwhelming, but they really don't have to be. Remember to keep good records for any deduction you plan to take, and you will be just fine.