Home Business Tax Basics for Beginners

As this was my first year doing my taxes as a freelance writer, I milked my accountant for every drop of information. Being the organizational freak that I am, I had first talked to her a year in advance, which turned out to be a good thing, because preparing your home business taxes is something that starts twelve months before. If you need to understand the basics of home business taxes, here's what I've learned.

Is a Home Office Deductible?

Yes and no. For a home office to be deductible it must be used exclusively for that purpose. Obviously no IRS agent will march into your home tomorrow to verify the fact, but the likelihood that your tax return will be audited is much higher (or as my accountant says, almost certain) because many people tend to cheat on this point. For this reason, I decided not to deduct my home office.

What Are the Home Office Deductions?

If you go ahead with the home office deductions you'll be able to deduct a portion of your utilities and mortgage equal to the size of your home office in relation to the rest of your home. Thus, for example, if your home is 1,000 square feet and your home office is 250 square feet, you'll be able to deduct 25% of your utilities and mortgage, with the mortgage already including your insurance and property taxes. I'll just add that you cannot deduct more than your business earned.

What Deductions Apply for All Small Businesses?

Whether your business is set in your home or not, there are tax deductions you can use. Advertising, business travel and entertainment, which may include business meals, are all tax deductible; although meals and entertainment are only deductible at 50%. Be sure to keep receipts for every item. Ideally, charge everything on the same credit card to have an itemized list at your disposal.

Can You Deduct Your Vehicle Expenses?

Yes, your vehicle expense is tax deductible. You may choose to itemize your gas, oil changes, insurance and any preventive services you did on the vehicle throughout the year; although it is simpler to use the standard mileage rate of $50.5 cents per mile of business mileage travelled. To that end, you'll need to keep a log in your car recording each trip, with the odometer reading for the start and end of the year recorded as well.

How Can You Save on Accounting?

When your accountant prepares your taxes, she'll charge you by the form she prepares. But when she has to do accounting work in order to complete your taxes, she'll charge you for her time. Therefore, to save money, do the accounting portion yourself. Create a master list for your receipts with a total amount. If you used a single credit card this will be easy. Create a total mileage amount for your vehicle log. If you recorded the odometer reading at the beginning and end of the year, this will be easy too. Create a master list of all your costs with a total amount, and a master list for your income, once more with a total. In short, do all the math yourself and your accountant won't have to waste expensive minutes doing it for you.

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