Home-Based Business Tax Deductions Guide

Running a home-based business comes with great benefits, including tax write-offs and deductions.

Understanding the tax deductions available will help you avoid giving more money to the government than necessary. 

Tax deductions can help reduce how much you owe by lowering your taxable income, which will in turn lower your taxes.

So, what tax deductions can you take advantage of for your home-based business? Let’s find out.

How Do Tax Deductions Work for Home-Based Businesses?

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A home-based business is one where an area of your home is used exclusively as a place of business.

To deduct expenses for a home-based business, you should incur “ordinary” and “necessary” expenses to operate your trade or business.

An “ordinary” expense is common and accepted in your industry. 

For example, if you are a freelance writer working from home, purchasing writing software is an ordinary expense, as others commonly use it in your profession.

A “necessary” expense is helpful and appropriate for conducting your business. 

It does not need to be indispensable, but it should aid your business activities.

To deduct home-based business expenses, these costs should be ordinary and necessary, and directly tied to your business operations. 

This includes direct business costs and a proportionate share of home expenses, like utilities and rent, if a specific area of your home is dedicated exclusively to your business operations.

What Can I Deduct from My Taxes as a Home-Based Business?

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The following list contains the most common deductions home-based business owners claim on their tax returns. 

Home office

The home office deduction saves you money on taxes if you work from home. This works whether you own a place or rent one.

To qualify, you should use a portion of your home exclusively and regularly for business.

You can use an area in your home as your principal place of business, where you meet clients or customers, or a separate detached structure solely for business purposes. 

The key requirement is that the area should be used exclusively for business. 

You cannot deduct expenses for any part of your home that is used for personal and business activities. 

Simply tally these expenses up and aim to deduct a portion of it under the home-office deduction.

Phone services

If you use your phone to conduct business, you can write off a portion of it as a self-employed tax deduction.

This includes phone service, storage, and additional apps or tools that are required for your business.

Internet bills fees

For home-based, self-employed individuals, having a reliable internet connection may be necessary to ensure your business operates smoothly.

Whether you are interacting with clients, conducting online workshops, or managing daily communications, you can deduct a significant portion of your internet expenses from your taxable income.

How it works – estimate how much of your internet service is used for business purposes and deduct that percentage of the costs.

Rent fees

If you’re renting a place for your business like an office, a storage area, or even a small spot in someone’s backyard— the rent you pay is tax deductible.

Whether it’s a big commercial space or a shed; if it’s necessary for your business, it counts.

Also, renting equipment and paying fees to cancel a business lease are both deductible expenses.

Repairs and maintenance

You may be able to deduct certain repair and maintenance costs, depending on whether the expense is for your office area or your whole home.

If you paid to repair something only in your office, like a window, you can deduct the full cost.

But if you paid for a repair for your whole home, like a roof leak, you can only deduct the percentage that matches your office space.

The key is to carefully calculate your office’s square footage compared to your total home and only deduct allowable expenses based on that percentage used for business.

Business meals

Suppose you are self-employed and have a meal while discussing business with someone like a business partner, client, vendor, or prospect. 

In that case, you can deduct a portion of these meal costs from your income. 

Here’s what you should ensure:

• At least one business contact: A business partner, client, vendor, or prospect.
• Business discussions and topics: The topic and conversions should be conducted in the pursuit of business income.

Typically, you can deduct 50% of meal expenses. Additionally, meals during business travel are usually 100% deductible.

Utilities deduction

Like rent, the bills you pay for keeping the lights on and the water flowing at your business place are also tax deductible. 

Consider paying these bills directly from your business account and keeping records so you’re well-prepared to claim every eligible deduction at tax time.

Health insurance premiums

Premiums for health, dental, and qualified long-term care (LTC) insurance for yourself are all deductible. 

Even if you pay for these premiums out of pocket, you may be able to setup reimbursement plans through your business to write-off these premiums.

This deduction helps reduce your taxable income and is taken directly on your personal tax return without itemizing.

Office supplies

Office supplies purchased for your business activities are generally deductible in the year you use them. 

You can write off supplies such as paper, toner, and pens used in your business.

Professional fees

The fees you pay for consulting, legal, and accounting services are tax-deductible if they are “normal” and “necessary” for your business operations. 

For example, if you hire a lawyer to review a contract or an accountant to handle your taxes, you can typically deduct these costs.

Education and training fees

Online classes, professional publications, reference books, and other training materials may be deductible on your return. 

You could write off education and training expenses as long as they maintain or improve skills in your current trade or profession.

Software subscriptions fees

If you’re paying monthly or annual fees for things like bookkeeping software, website hosting, or cloud-based programs such as Dropbox or Adobe, here’s some good news – these costs may be deductible on your taxes if used for your business.

Employees’ salaries and contracted labor

For home-based small businesses, the rules around deducting employee compensation and contract labor costs are the same, but there are some additional considerations.:

If you have a home-based business with W-2 employees, you can deduct their salaries, bonuses, commissions, and other compensation just like any other company. 

However, since they may be working remotely from their home, properly track and document their work hours, duties performed, and payments made.

Independent contractors and freelancers

Hiring independent contractors or freelancers is common for home-based businesses looking for flexibility. 

As the business owner, you can deduct amounts paid to these non-employees for services rendered. 

Just be diligent about issuing 1099-NEC forms to any individual you paid $600 or more to over the tax year.

Advertising

All the money you spend on advertising—like flyers, business cards, digital ads, and billboards—can typically be deducted on your taxes as long as they are reasonable and directly related to your business activities.

Vehicle use

When you drive your car for your own business needs, you can deduct a portion of your vehicle costs under your business.

Just remember, you should keep a good record of every drive for work. 

You can record the date, distance, destination, and business purpose associated with the trip.

What Records Should I Keep to Support My Home-Based Business Tax Deductions?

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It is critical to keep thorough records to support the tax deductions for your home-based business.

Your record-keeping system should summarize your business transactions, typically in accounting journals and ledgers. 

For most small businesses, the primary source for these entries is the business checking account.

Records will be invaluable when it’s time to prove your deductions if necessary.

Bottom Line

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A home-based business offers many benefits, both for the extra income it can bring in and the tax breaks it can provide. But it also comes with added tax responsibilities.

Claiming all the deductions you qualify for is important to maximize your profits.

While tracking expenses and calculating deductions can feel like a hassle, it pays off tremendously at tax time.

Take advantage of all the deductions listed above.

If you need to bring in a tax professional, our firm specializes in helping small businesses like yours. 

Contact us, and we’ll get you set up with a CPA dedicated to saving you every last dollar through legitimate deductions. 

Remember, you work hard as your own boss. Don’t give the government more money than legally required.