Small business guide to home tax deductions

Whether you own a traditional business out of your home or you're a freelancer working in the gig economy, the IRS gives you plenty of opportunities to write off expenses that relate to your work and business.
Written by Jason Lee, Contributing Writer

Operating a small business is exciting and often affords you an elevated quality of life. As an entrepreneur, you know that keeping your business churning involves saving wherever you can. You could be taking advantage of savings is through tax deductions for home-based businesses; the IRS provides business owners many unique ways to lower their tax liabilities and put more money back into their pockets or business.

What is a home-based business?

A home-based business is any business that you run out of your home or that uses part of your home as a principal place of business. This includes traditional businesses with offices at home, like some accountants or financial planners. But it also includes freelance workers that conduct business online or directly from their houses like graphic designers, writers, and editors.

Are you a freelance writer who uses your home as your principal place of business? Then you have a home-based business. Are you a seller on Etsy who stores products at your house? Then you have a home-based business. The classification of a home business by IRS standards is much more inclusive than some people might think.

What qualifies as a home-based business?

A common misconception is that your home must have a storefront, or you must have customer traffic to count as a home-based business. This is not the case. According to the IRS, you must use part of your home for one of the following reasons to qualify:

  • Exclusively and regularly as your principal place of business for your trade or business;
  • Exclusively and regularly as a place where you meet and deal with your patients, clients, or customers in the normal course of your trade or business;
  • A separate structure that's not attached to your home used exclusively and regularly in connection with your trade or business;
  • On a regular basis for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale;
  • For rental use; or
  • As a daycare facility

Examples of home jobs that could qualify include:

  • Freelance writers, editors, and translators
  • Graphic designers
  • Home-based daycare providers
  • Etsy sellers
  • Personal trainers with at-home gyms for training
  • Service providers working out of a home office

Tax deductions for home-based businesses

Once you've determined you qualify as a home-based business, it's time to look at the different tax deductions you can get. Keep in mind the tax code is always changing, so reach out to a tax professional or visit the IRS for the latest information.

Here are the current, most popular tax deductions for home-based businesses you can take on your income taxes:

Home office space

When you use a portion of your home for business purposes, you can deduct that expense from your taxes. Surprisingly, some business owners neglect to take the deduction because they claim it is too confusing to calculate. While the frustration can be understood, it's no reason to leave money on the table.

Using the IRS's simplified calculation method, taxpayers can deduct $5 per square foot of their home that is used for business with a maximum of 300 square feet. For example, if your home office is 200 square feet, your deduction would be 200 x $5 = $1,000. This method is the most ideal for individuals who file their taxes or prefer the simplified process.

Travel expenses and mileage

Any travel or driving that you do for the sole purpose of your business can be deducted from your taxes. The definition of qualifying travel given by the IRS is, "The ordinary and necessary expenses of traveling away from home for your business, profession or job." The IRS goes on further to point out that extravagant expenses or those for personal use cannot be deducted.

Examples of things that you may include involve mileage for driving to meet clients, traveling to source materials, shipping of bags on trips, taxi fare to hotels, and business calls while on a business trip. A more complete list is available on the IRS website.

Work-related education expenses

The IRS allows certain types of businesses to write off work-related education expenses.

Expenses including tuition, books, supplies, training courses, and research costs can be deducted. Certain types of businesses may not be eligible for this deduction. Speak to a tax professional in your state for eligibility clarification.

Tax deductions for employees of non-home-based businesses who work at home

Before 2018, salaried employees who worked from home for another company could deduct unreimbursed expenses from their taxes. However, this provision was removed from the tax code in 2018.

Still, there may be a few individuals who can at least qualify for the home office deduction as salaried employees. You will need to speak with a tax specialist to see if you qualify. Additionally, be aware these provisions do not apply to freelancers or gig economy workers.

Tax deductions for freelancers who work from home

Freelancers who work from home will have the same access to deductions as people with home-based businesses. Why? Because in most states, you are technically classified as a business. You are a sole proprietorship or an LLC (if you've incorporated). Because of this, you get to enjoy the same tax benefits as more traditional businesses not a part of the gig economy.

Home office space

This exemption works the same as it does for home-based businesses. The methods the IRS has laid out for calculations are the same as previously mentioned.

Travel expenses and mileage

Just as home businesses can deduct travel and mileage used for business purposes, so are you. It doesn't matter that you are using your vehicle and not a specific work car. Make sure to keep a good record of your mileage and expenses along with the reasons for each trip.

Work-related education expenses

As a freelancer, it's important always to work hard to set yourself a step ahead of the competition. Work-related education expenses like seminars, training books, online resources, and classes may be deductible if they pertain to your specific work.

Tax tips for filing from home

  • Keep track of your mileage and travel expenses. Get a logbook or a mobile app that lets you track your mileage for business needs.
  • Consider a home office deduction. Don't be scared off from filing a home office deduction because it seems confusing. If anything, the simple method will help you to calculate your deduction easily.
  • Keep records all year long. Paying your taxes shouldn't be a one-time a year event. If you keep good annual records, filing your end-of-the-year taxes should be simpler.
  • Pay quarterly taxes. The IRS looks at some business owners and freelancers as pay-as-you-go entities. If you fall into this category, you'll need to pay estimated taxes quarterly to avoid IRS penalties.
  • Use software or a tax professional. If you're confused about how to file your taxes, you may want to look into consulting a professional or using tax software. Spending a few bucks on the front end for professional help could end up saving you thousands when you file. Tax professionals are the most knowledgeable about deductions and best practices for businesses and individuals.

[This article was originally published on The Simple Dollar in August, 2020. It was updated in November, 2021.]

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