Take advantage of all the tax deductions available to you when you work from home.

A benefit of working from home that you should definitely take advantage of is the fact that you can deduct a lot of your home office-related expenses.

Here are 12 expenses you can and should claim:

1. Home office

According to the IRS, a home office must be a space devoted to your business and absolutely nothing else. It won’t do to use the room that houses the family computer, because it won’t count if anyone else in your family uses it. Your home office can be a full room or part of a room. You can find out how much of the space is deductible by measuring your work area and dividing it by the square footage of your home. You can claim the fraction of your rent, mortgage, insurance, electricity, and more that is encompassed by this.

2. Office supplies

Hang on to the receipts for the office supplies you buy, because you can use them to offset your taxable business income.

3. Furniture

You have two choices when it comes to the office furniture you acquire. You can either deduct 100% of the cost in the year you purchase it, or deduct a portion of the cost over seven years, a practice known as depreciation. If you choose to depreciate the furniture, you will have to use an IRS chart to make separate calculations each year. You can’t just split the cost into equal portions over the depreciation period. The option that is better for you depends on when your business will need these deductions the most.

4. Other equipment

Items such as computers, photocopiers, fax machines, and scanners are also tax deductible. You can take 100% of your deductions upfront or depreciate them over five years.

5. Telephone charges

The IRS assumes that you have a phone in your house, so don’t try to include your regular fees and charges toward your deduction. You can deduct 100% of the cost of the business calls that you make from home at the end of the year. All your phone charges are deductible if you have a second phone line installed that you only use for business.

6. Software and subscriptions

You can fully deduct costs for computer software, as well as business and industry-related magazine subscriptions, in the year they are purchased.

7. Travel and meals

When you’re travelling for purposes related to your small business, the cost of travel (whether by car, plane, or train) and hotel expenses are 100% deductible, as are costs associated with your day-to-day travel expenses (e.g. dry cleaning, rental cars, etc.). Only 50% of your meals are deductible when you’re traveling, however. Your on-the-job meals are normally not deductible unless you’re talking business with a client while dining. Then you can write off 50% of your meal as a work-related dining cost.

8. Entertainment and gifts

A direct gift to a client or employee is 100% deductible, up to $25 per person per year. You can also deduct 50% from most client entertainment expenses.

9. Mileage

If you drive for business, you will need to keep a notebook in your vehicle to log the date, mileage, tolls, parking costs, and the purpose of your trips.

At the end of the year, you can total the mileage and add in the tolls and parking to calculate your deduction. Alternatively, you could measure your business use against your personal driving and deduct that portion of your auto-related expenses, including gas, repairs, and insurance.

If you are leasing your vehicle, include those payments. If you are buying the car, factor in the interest on your loan and depreciation on your vehicle.

And if your company’s office is at your house, you can deduct the entire business-related mileage, from the minute you pull out of the driveway until you return home. You can only start deducting at your first business-related destination to your last when your business isn’t home-based.

10. Insurance premiums

If you are self-employed and paying your own health insurance premiums, then you can deduct 100% of these costs, as long as they are not more than your business’ net profit or if you are eligible for other health care coverage, including that offered by your employed spouse’s medical plan.

If your spouse worked for you last year, then you can get the full medical premiums deduction on your return. As an employee, your spouse’s premiums are 100% deductible; if you and the children were on her policy as dependents, so are those costs.

You must make sure that your spouse’s employment is real (not in name only), and you must offer coverage equally to any other employees. If you don’t meet these requirements, you could end up with a lawsuit, an audit, or both.

11. Retirement contributions

If you are saving up for your retirement, you can deduct your contribution on your personal income tax return.

12. Social Security

The downside of being self-employed or starting a small business is that you will have to pay double the Social Security contributions you would as an employee. (Federal law requires the employer pay half and the employee pay half, and you are both when you are self-employed.) On the upside, you can deduct half of the contribution on your 1040.

13. Employing your kids

If you operate as a sole proprieter or partnership in which you and your spouse are the only partners, you can deduct the salary of your children if you employ them. If they are 17 or younger, you won’t have to pay a Social Security tax. Depending on how much you pay them, they may be able to avoid paying income taxes.

Figure out which of these expenses you can start deducting from your taxes to reap the full benefits that working from home can bring!

By Cathy Lau

Tags: Getting Started