A List of Tax Benefits of Starting a Home Business & Getting Ahead in Life
I have always believed that starting a home business is the best tax planning strategy and because the biggest expense in our lifetime is the income taxes we pay, thus the best way to get ahead in life.
If you are an entrepreneur operating from your home, don’t be shy to claim the rightful tax deductions you are entitled to. While this article is specific to the United States tax code, most income taxing jurisdictions follow the same general theme, favoring businesses over individuals from a taxing perspective.
If you are a blogger, internet marketer or an online business owner of any sort and work out of your home for at least part of the year, consider taking advantage of the tax benefits for starting a home business.
This article is also inspired by a woman’s story I read in a magazine yesterday while getting my hair cut. In the story, the woman opted to start a home based babysitting business so she could raise her daughter and not have to send her to a day care.
Here are some of the ways how starting a home business led to significant tax advantages for her family:
Home Office Deduction
Most business owners, part time or full time are afraid of taking this deduction because they fear being audited by the IRS. That is rubbish. Make sure you take this deduction if you are starting a home business.
First of all, merely claiming a home office deduction is not a red flag in itself. Second, even if it was, what do you have to be afraid of? I have been audited by the IRS multiple times. I have never had to pay additional taxes, fees or penalties. In fact, I ended up getting more money back on two occasions, plus an apology for wasting my valuable time.
When you are operating a home business, you are entitled to deduct a portion of your rent or mortgage payment, as well as other bills that pertain to operating your home such as security systems, phone bills, cable TV, yard maintenance, property taxes, etc.
Medical Expense Deductions
When you have a home based business, you can take advantage of medical expense deductions through a reimbursement plan adopted by your business.
Most medical expenses such as cosmetic treatments, braces and LASIK surgery fall under the “non reimbursable medical expense” category. Not if you operate a home business however.
With a medical expense reimbursement plan, you can employ your spouse and their children (therefore your children) and cover expenses like braces, LASIK and routine purchases at the local CVS or Wallgreens pharmacy.
You can read more about taking advantage of the medical expense deduction that is available to you when starting a home business.
Vehicle Deduction
Usage of your personal vehicle for your home business related tasks is also fully deductible under the tax code. When you use your vehicle for business, such as picking up and dropping off people or stuff, or making business related purchases, meeting clients for lunches, you qualify for the vehicle deduction when filing your taxes.
You can either claim the deduction by stating the miles drive attributed to business use, or actual expenses incurred as part of doing business. The prior is the easier method which most people opt for, but make sure you optimize your vehicle deduction as much as possible by analyzing actual costs. Many people leave far too much money on the table by opting for the easier route.
Meals, Entertainment & Travel
Meals, entertainment and travel expenses incurred in the name of business are also deductible. Starting a home business doesn’t mean you are always at home. For example, if you took a family trip (say a vacation) somewhere exotic and decided to spend a few hours conducting business, you can officially deduct a part or all of your trip’s expenses as a business expense.
Meals and entertainment expenses picked up while in transit during business hours, or wining and dining clients are also deductible. Make sure to keep all your receipts. Better yet, use one credit card for all business related expenses.
Retirement Plans
A typical W2 employee can usually stash retirement cash away in a 401k plan and an IRA (Individual Retirement Account). The limit for each as of the time of this post is $16,000+ and $5,000 per year.
As a home business owner, you are entitled to a more aggressive deferred tax plan such as the SEP plan. As of the time of this post, you are allowed to pump up to $46,000 into that account. Oh yeah!
Other Cost Savings of Starting a Home Business
One of the most interesting benefits of operating a home based business in my opinion are the ancillary savings that result from you simply operating from home as opposed to driving to an office space to work.
For example, if you have children, you may be able to save on day care expenses, which is the largest expense after rent for many families. In some cases, it is just as much if not more than the rent they pay! You save on gasoline bills. You depreciate your car less. If your route involves toll charges and parking at work, you get to avoid all those, and then some.
You don’t have dry cleaning bills because you no longer have to wear that freshly cleaned and steam ironed shirt to work. You avoid spending 200% more on lunches because you have to dine out. Can you think of more collateral benefits of simply working from home?
Concluding Thoughts on Starting a Home Business
I understand that these benefits pertain specifically to those who primarily own their own business. However, thes advantages of a starting a home business apply to those working full time and running a side business (read why you should!) at the same time as well. That said, all of the above are just a handful of benefits of operating your own business. There is a lot more to it that is well worth looking into.
Although the example in this article is specific to babysitting, it really applies to any home business. For example, this can apply to tutoring, data entry, transcribing, bookkeeping, blogging, Internet marketing and all sorts of other home based businesses.
This post also further reinforces why owning a side business is the best tax planning strategy, and yet one which a majority of Americans either don’t know about, understand or don’t act upon (some just don’t want to for various reasons).
Readers: Are you taking legal advantage of the tax code? Or are you giving away more than half your income away to uncle Sam? How do you file your taxes? Do you hire a CPA? As entrepreneurs who work from home, do you feel you need more guidance or assistance in ensuring that you are maximizing your tax benefits and legally paying the least amount in income taxes?
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18 Responses to “A List of Tax Benefits of Starting a Home Business & Getting Ahead in Life”
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There definitely are a ton of benefits but you have to make sure you claim them properly. A good accountant or CPA should be able to point you in the right direction. I know when I prepared tax returns at a CPA office we did do a lot of home office deductions but you have to have the back up.
most definitely Lance. one always has to be prepared for random (or targeted) audits. a clean tax return certainly helps mitigate the chance
Hi Sunil,
Thanks for a great post! Do you have any advice for newish bloggers who have started out and who aren’t making any income yet? Do we have the ability to claim anything at all or do we need to be producing an income first before we are able to make legitimate claims? The challenge for me is investing in start up costs, but not necessarily reaping much (if any) rewards at the very beginning. Cheers 🙂 Vanessa
welcome Vanessa. the IRS allows us to take start up costs as deductions. if your business is set up as a sole prop or a single member LLC and you file your business income/loss on a schedule C of your tax return, you can flow through the income or loss to your main 1040 and add or offset with your wage income from a job if you have it.
example: if your work pays you 65k a year and you “lost” 10k on your web business, your taxable income is now reduced to 55k. of course you have other deductions as well but you get the point. I have several posts on this topic that I encourage you to refer to, including the post on effective tax rate
not legal or tax advice – consult your professional
does that help?
Thanks Sunil – that’s a good place for me to start, and I’ll ask my accountant for some further advice. Thanks for the post, I appreciate it!
all the best Vanessa
To add to what Sunil said, specifically the office in the home deductions cant give you a loss or increase your loss in a given year, but you would still want to fill out form 8829 as the expenses, though not tax deductible when you have a loss, still accrue and carry forward so whenever you do have a gain, you are able to use up those home office expenses from previous years.
yes – important to keep good historical records for carry back and forward purposes.
I greatly appreciate your site. I have learned a great deal since I started reading it.
you are most welcome Frank
For me, tax is very painful that can be suffered every month. Hope the government must imposed tax that can compensate or balance person’s monthly salary because its very traumatic.
well Chris our tax code is progressive in that it is supposed to be proportionate to your income. easier said and depicted than practical – what would you say you’d do (changes you’d implement) to make it more reasonable?
Hi, Sunil:
This is an area of which I need a lot of help in, but it’s so overwhelming that one doesn’t know where to begin.
What if one doesn’t have a normal day job and their sole income is self employed income, how does that change your example above to Vanessa?
Kindly,
Missy
good question Missy – and to put it in perspective so that I can answer the best I can, what makes self employment different in your mind from a full time job working for wage income specifically as it relates to starting a home business?
The home office deduction makes sense if you occupy a large portion of your house for your business. But have a 140 square foot office in a 1,400 square foot house does not save much in tax.
Good article though.
I guess that depends on your definition of what much in tax means. Using the new simplified method for office in home, for a home business that has a profit, a 140 sq foot office would save you, at minimum, $200. That’s assuming you’re in the 15% bracket and live in a state without a state income tax. If you are in a higher bracket or live in a state with an income tax then the savings will be higher.
While $200 may not seem like a ton of money to some people, its a nice chunk of change, plus I’d rather have $200 than give it to the government.
Mark, thank you for your comments. I agree, I’d rather have that benefit (little or large) than hand it over. This is the premise of the article
Yes of course, the larger the better from a tax saving perspective. Just ensure that you can provide strong support when asked/questioned. Many do this by secluding such areas of their home (confined space)