Tax Deductions for Home Businesses

Tax Deductions for Home Businesses

July 7, 2021

If you own a small business that operates out of your home, there are some tax deductions you should know about. They can make the difference between overpaying and getting a hefty refund. Any time you can save on your tax bill, your business will benefit.

Working with a financial consulting firm in Hayward, CA is the best way to ensure you take all the deductions for which you qualify. Here are some of the home business tax deductions you might be able to use.

The home office deduction

The home office deduction might include a strict set of rules, but it can help keep the costs of running a business much lower. To qualify, you need to be able to prove that your home is your principal place of business, and the office is “regularly and exclusively” used for conducting business. Otherwise, you will not be able to take the deduction. That is, if your home office is also your kids’ school room—or you do most of your business from your living room couch—you won’t qualify. There are exceptions for daycare facilities and businesses that store product samples and inventory.

Remember, this is only available for independent contractors or registered business owners. You cannot take the home office deduction if you worked for another company from home.

What you can deduct with the home office deduction

When you take this deduction, you can deduct expenses based on the percentage of your home you use as an office. If your office is 15 percent of your entire home’s footprint, you can deduct 15 percent of your mortgage insurance and interest, homeowners insurance, cleaning services for your business space, utilities and homeowners association fees.

You can also deduct repairs and maintenance. These expenses are separated into “direct” and “indirect” expenses. For example, if your roof is leaking and you repair it, you can take the home office deduction based on percentage. However, if you need to fix something exclusively in that room, such as a broken window or ruined carpet, you can deduct the full expense. Long-term improvements can be deducted, with depreciation.

Other business expenses can be deducted, too. Here are some of the most popular ones:

  • Cost of goods sold: If you purchase goods for resale, you can deduct the cost of these items.
  • Employee payments: Paying your employees is generally deductible.
  • Business use of your car: You can deduct car-related expenses, based on the percentage you use your car for your business.
  • Supplies and materials: Any business-related supplies or materials purchased can be deducted for that tax year.
  • Professional services and marketing: Any professional services, such as marketing, accounting, legal, contract labor and more, can be deducted.
  • Meals and entertainment: You can deduct 50 percent of your meals and entertainment for business purposes.

If you need help determining which home business expenses you can deduct, visit a financial consulting firm in Hayward, CA. Menjivar & Company CPAs, Inc. is here to serve clients throughout the Castro Valley area—reach out today to schedule a consultation.

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