At home businesses have many advantages over their brick-and-mortar counterparts. For a start, entrepreneurs save money on gas and office rent. Similarly, freelancers that operate online enjoy unique benefits in comparison to employees who commute to a physical office location. However, transportation costs and rent are on the tax deductible expenses list of traditional businesses, but not digital ones. Nonetheless, remote entities can still utilize work from home tax deductions that other employees and firms don’t enjoy.
If you run an online company or freelance digitally, doing taxes can be a nightmare, even more so when personal and business expenses are intertwined. For example, your electricity bill and rent on a personal residence also go towards business costs, especially when you have an at-home office. Above all else, self-employed workers must save for taxes, instead of have an employer deduct it from each paycheck. They must also pay the entire portion of their Social Security contributions.
Needless to say, all of this paperwork makes filing taxes complicated and tedious. Yet the tax deductible expenses list that at-home businesses can take advantage of makes this time-consuming task worthwhile. In comparison to W-2 employees, online freelancers can deduct office supplies, coffee, water, and utility bills from their taxes. Similarly, remote business owners may deduct plenty of personal expenses, while brick-and-mortar firms can’t.
Personal Bills and Work From Home Tax Deductions
There are two types of household expenses that home-based firms can use as tax deductions: Rent and bills.
Firstly, if you have a home office, the portion of your rent that goes towards it counts as a business cost. In fact, this is the case even if you have another physical office location outside of the house.
Secondly, if you mostly use your Wi-Fi to work on projects and your phone to call clients, then your internet and phone bills are on the tax deductible expenses list.
Before a home office can count as a deduction, it must meet certain conditions. More specifically, you must only use the room for business purposes and on a regular basis.
If you work from your living room, which also acts as a recreational space, it cannot be deducted as a business cost. However, if the office is a separate room that is only used for work, you can include it in your tax deductible expenses list.
Additionally, the space has to be a primary business location. As an example, if you rent an office outside of the home and only use the room once or twice per month (if needed), then it isn’t amongst the work from home tax deductions that you may tax advantage of.
However, if your business relies on your residential workspace for daily or ongoing operations, then your home office is deductible.
To illustrate how this works, here is an example: A family lives in a four-bedroom house that is 4,000 square feet. Their monthly rent is $2,000.
One of the family members operates an at-home business and uses one of the rooms as an office. Their work space is 500 sq. ft.
To figure out their deduction, the household would first divide the size of the home office (500 sq. ft.) by the entire residence’s area (4,000 sq. ft.). In this case, the work room occupies about 12% of the house’s total space.
As a result, that percentage of the rent (12% of $2,000 or $240 a month) can be added to the tax deductible expenses list.
To clarify, at the end of the year, the family would report $2,880 ($240 times 12 months) as a business cost.
Personal Costs and Bills
At a physical office, employers will report the cost of water, coffee, snacks, utility bills, and phone invoices as operational expenses. Similarly, workers at that location can count their lunch and coffee (if they pay for it) as a business tax deduction.
As an at-home business, these same expenses also come with tax advantages. For example, if you run an online firm and only use your Wi-Fi for that purpose (as opposed to streaming movies), the entire internet bill is a deduction.
Even if you go online for both business and recreational reasons, you may deduct the portion of the bill that’s used for work. The same logic applies to utilities, electricity, water, and phone expenses.
Equally as important, you can consider the meals that you consume during work hours as a business cost, including water, coffee, and snacks. However, if you choose to do so, entrepreneurs must collect and organize receipts, especially in case the IRS audits them.
Operational Costs and Your Tax Deductible Expenses List
An at-home business is still what it is: A business. In short, whether your firm operates in a physical or a digital space, you can deduct marketing, payroll, equipment (such as laptops or printers), and office supplies (pens, paper, notebooks, …etc.).
Platform fees are amongst the major work from home tax deductions that many entrepreneurs forget about. A seller on Etsy, for instance, may have to pay a monthly membership fee. Moreover, Etsy might charge them a percentage of the profit from each sale.
While the IRS requires you to report your full, pre-fee income, home-based businesses can count those costs as deductible operational expenses.
Time and Effort
Many people mistakenly believe that they need to hire a professional accountant in order to claim the work from home tax deductions.
This perceptron is wrong. Firstly, entrepreneurs can use digital filing software, an approach that is both reliable and less-expensive than an accountant. In fact, even the IRS has a list of the best online budgeting tools for tax filing.
Secondly, despite that this process is very time-consuming, the savings are worth it. The average taxpayer takes 16 hours to prepare their paperwork and file it. If they use an accountant, on the other hand, consumers will incur a fee of $300 or more.
In other words, based on the figures above, self-filing can save you $20 per hour (assuming that it takes you 16 hours to do so). The benefits are even more advantageous because the IRS customer service department assists taxpayers for free and provides them with valuable resources.
Uncle Sam Comes Over
Running a business out of your house or apartment has plenty of positive aspects. You can save money on gas, food, and office rent. Perhaps most importantly, both personal and business expenses will count towards your work from home tax deductions.
This includes portions of your rent, internet, electricity, and other bills.
To make this process easier, remote business owners and freelancers should start preparing now. Doing so makes the paperwork and accounting simple and straight forward.
When we combine that with an expanded tax deductible expenses list, working from home becomes even more convenient.