How does paying $5,000-$10,000 dollars less in taxes next year sound to you?
Did you know that by starting a home-based business you have created a tax saving machine? What is a home-based business? According to the IRS, a home based business is one in which a part of the home is used exclusively and regularly for business activities.
Having a home-based business can save the average household thousands of dollars in taxes every year. This is true, even if the business is not yet profitable. Every new business has start-up costs. Those start-up costs affect profitability. Congress understood this when they established small business tax law.
There are three things you need to do to qualify for tax breaks as a home-based business owner:
- Work your business on a regular and consistent business. By the way, the tax courts made a ruling in favor of a woman who worked an average of 45 minutes a day, 4-5 days a week.
- Show intent to make a profit.
- Keep a record of expenses.
Using your home as a place of business
You can deduct expenses for all areas of your home that you use exclusively for business. This includes storage space, office space, etc. To calculate your deduction, Take the total square footage of the portion of your home used for business and divide it by the total square footage of your home. Whatever percentage of your home is used exclusively for business, you can write off that percentage of your mortgage or rent, your maintenance / repairs, utilities, homeowners association dues, homeowners insurances, property taxes and other housing-related expenses.
For example, if you use 10% of your home for your business, this is what you could be saving if you are in a 25% tax bracket:
| Annual Expense | Deduction at 10% | Cash to you | |
| Rent / Mortgage | $12,000 | $1,200 | $300 |
| Maintenance | $1,500 | $150 | $38 |
| Utilities | $3,600 | $360 | $90 |
| Property Taxes | $3,000 | $300 | $75 |
| Insurance | $1,000 | $100 | $25 |
| Total | $21,100 | $2,110 | $527.50 |
Business miles using your vehicle
According to AAA, the average American drove 12,000 miles last year. The IRS deduction for using your vehicle for business use is 56.5₵ a mile. If 50% of your miles business miles, you will receive a $3,390 tax deduction, netting $847.50 in your pocket if you are in the 25% tax bracket.
In order to claim this deduction, you need to keep a mileage book. If you are running errands – dropping kids at school, getting groceries, going to the post office, etc. – the cost of the trip is deductible if there is one stop that includes a business purpose. In this case, it would be the trip to the post office.
Hiring your kids
If you pay your child a $10/week allowance, you need to earn about $13 in pretax dollars to pay them. But if your child works for you, the $10 is a tax deduction. So the net cost to you is $7.50. A child under the age of 18 is allowed to earn $6,100 without having to pay taxes on that income.
Here are some ways your children can earn their salary:
- Making sample kits to send to prospective customers
- Organizing brochures
- Addressing envelopes
- Cleaning
- Listening to motivational / inspirational materials or reading self-improvement books
- Setting up and cleaning up after events in your home.
- Babysitting younger siblings
- Babysitting your guests’ young children
You need to pay your child with a business check in order to establish a paper trail. You can set up a custodial checking account for your child. The courts have ruled that the custodian may use funds in a custodial account for anything that benefits the child. These expenses may include tuition at a private school, a college fund, sports programs, etc.
A tax court judge said that any child over 6 can earn money working in a parent’s home-based business. You also do not pay any payroll tax for children under 18 years of age.
Health care expenses
The average employee is only able to write of their health insurance premiums. But the home-based business owner is able to fully deduct EVERY health care expense, not only for themselves, but for every member of their family. Here are some health care expenses you can deduct as a home business owner.
- Insurance premiums
- Annual deductible expenses
- Co-pays
- Chiropractic care
- Acupuncture
- Vision care expenses
- Dental, including orthodontics
In order to take advantage of the health care expense deductions, you need to have an employee. The easiest way to accomplish this is by employing your spouse. Another option is to establish a C-corp and hire yourself as an employee. As a business owner, you are able to offer health insurance benefits to your employees. Those expenses are all tax deductible.
As a business owner, you will establish a document called an HRA (Health Reimbursement Arrangement). This HRA states that the business will reimburse all health care expenses for the employee and his / her immediate family.
According to a survey of 25,000 taxpayers who had HRA plans last year, the average taxpayer received an additional $4,972 in tax refunds using this single deduction.
Business travel
You can spend as little as 60 minutes a week on business write off the entire expense of the trip. The nature of the business to be conducted must be established in advance. You need to plan a meeting. As long as this requirement is met, the trip is deductible.
Entertainment deductions
Entertainment expenses are 50% tax deductible. The exception to this is for entertaining in your home. Entertaining in your home is deductible at 100%.
In summary, taking only three of the six deductions I mentioned, the average American can receive a tax credit that is thousands of dollars more than it would have been without the benefit of home-based business deductions.
Home Deductions: $527.50
Auto Deductions: $847.50
Health Expense Deductions: $4,972
Total: $6,347 IN YOUR POCKET!!!
These numbers are based on AVERAGE Americans. If you are in a higher tax bracket, your refund amount will be even greater. And if you are able to employ your children, the tax savings can rival the amount of your health expense deduction.
These deductions aren’t just applied against income from your home-based business. You can apply the deductions against W-2 income from you or your spouse as well.
As we approach a new year, consider giving your household income a bump in 2014 by starting a home-based business today. Contact me to learn more about how you can maximize the deductions the IRS has set in place for home-based business owners.
NOTE: I am NOT a certified tax accountant and am not qualified to give advice on your taxes. Every calculation I have given is intended as an example, not an estimate of your actual tax savings. You will need to meet with a tax advisor to establish the specific tax savings you will receive by starting a home-based business.
