In case you haven’t noticed, the deadline to file your income tax forms is tomorrow. When going through all the numbers associated with your home-based business, don’t sell yourself short when it comes to home office expenses. This applies not only to people who actually work from home — like freelance writers and web designers — but also people who use their homes as a “home base” for their business. The latter group could include plumbers, electricians, and general contractors, for example.
It is best for you to consult a tax professional on the manner, but here are a few areas that you can consider when tallying up your home office expenses.
1. Equipment and tools. Did you buy a new computer for your home office? How about that executive chair, printer, and digital camera? If you use these items for the purpose of running your business, they serve as a perfectly legitimate expense. You may or may not be able to “write off” the entirety of the price paid, so consult with your accountant to be sure.
2. Communication charges. No matter what kind of business that you run from your home, there is a significant chance that you use your phone and Internet service in some way for work-related matters. Assume a fair and suitable percentage of these costs for business expenses.
3. Rent, utilities, and other fees. You will obviously not be able to expense the entirety of your monthly mortgage payment, but a portion of your mortgage interest can be written off as a home office expense. The easiest way to do this is by square footage. If 10% of your home is used as an office, then you can write off 10% of the interest portion on your mortgage payment.
Part of the appeal of starting a home-based business is that you are able to write off expenses that you would be paying anyways. Keep an eye out for things around the home that you use for work and you may be able to reduce the amount of income tax you pay by a considerable amount.
Nick
April 29, 2008 7:15 pm
Sorry if this is a stupid question , but what does it really mean when you write off something for your business.
What kind of money do you get back lets say if you write off 1000$ in tools? How is that all calculated?
blogadmin
April 29, 2008 7:22 pm
Lets use a case to explain the answer.
If your business had $5000 in revenue. Your cost of goods (COG’s) is $2000 this leaves you with $3000.
So now if you bought $1000 in tools for the business instead of having $3000 in profit you now would have $2000. You would end up having to pay taxes on the $2000 profit instead of the $3000. The more things you can write off the less you have to pay in taxes.
Just remember the less taxes you pay the odds of being audited go up. So be sure they are all legitimate and save your receipts for 7 years.
Rhetorical
April 29, 2008 7:28 pm
Precisely. The amount you save is dependent on your marginal tax rate. “Writing off” $1000 in expenses when you earn $100,000 in profit is different than writing off $1000 in expenses when you earn $2000 in profit.
Nick
May 1, 2008 6:45 pm
Thanks i understand now what it means.
But you wouldn’t be able to write off something that really doesn’t have to do with your business?