Opening your own business is a very exciting time.
You've likely spent a lot of effort planning all the details and thinking about how you can best succeed. It's a time to enjoy yourself and start doing the job you've always wanted to do.
As you embark on this adventure, finances will unfortunately be one of the most important pieces of the puzzle. Whether we'd like to admit it or not, without money in the bank, it will be hard to keep a small business running.
But don't get too worried. There are plenty of ways to save money when running a small business. One great technique that many people may not be aware of is the home office deduction.
Of course, having a home office will be dependent on the type of business you run. For instance, if your company relies on walk-in customers, you will probably want to be in a location with more foot traffic. However, if running your business from home is an option for you, it should definitely be considered.
Am I qualified for a home office deduction?
In order to legally take a home office deduction on your tax returns at the end of the year, there are a few requirements you have to meet first. According to the IRS, the "office" part of your home must be used "exclusively and regularly" either as your principal place of business; where you meet with patients, clients or customers; or for any other business activities, as long as the office is in a structure that is separate from your house.
The good news is that you can qualify whether you are self-employed or an employee. In addition, there are no restrictions on where your workspace can be, so feel free to set up in a garage, art studio or any other area you prefer.
Finally, you can make a home office tax deduction whether you're a homeowner or a renter. In fact, mobile homes and boats legally count as houses under tax law, as long as you eat and sleep there.
The benefit of making this deduction is that you can save money by writing off many expenses. According to the U.S. Small Business Administration, these deductions have to be "ordinary and necessary." An ordinary expense would be anything that is common in your trade. So, in the case of a home office, that could be the installation of a business telephone line. Similarly, a necessary deduction will depend on your situation, but something like software that is required for your operations would count. IRS Form 8829 can give you a comprehensive list of available and appropriate deductions.
It used to be really difficult to figure out how much to write off for your home office tax deduction. Fortunately, the IRS recently created a more simplified method. It is available for taxable years beginning on or after January 1, 2013. The old option is still offered if you prefer it, but this alternative will eliminate the potential paperwork headache.
The simplified technique relies on the square footage of your workspace. All you'll need to do is determine the percentage of your home used for your business. Then, multiply that square footage by the rate prescribed by the IRS. Form 8829 can be helpful with this, as well.
With the old deduction method, it was necessary to calculate exactly what your total business expenses were. This requires a great deal of record-keeping and time. Plus, it is vital you separate personal home expenses from business ones, and this can be more confusing if you use the traditional option.