Running a business out of your home can be a great way to keep your costs lean and maximize your chances of success. There are also a multitude of tax breaks that are easy to overlook but can really add up. Considering that only about half of all businesses survive their first five years of existence -- and usually because they run out of money -- keeping tax expenses as low as possible could mean the difference between barely surviving and thriving.
To help you get started, here are three of the most important tax breaks when running your business from home.
1. Deducting expenses related to the space you use
The home office deduction might be one of the best deductions your at-home business qualifies for. If you use a dedicated portion of your home -- let's say you've converted a spare room into the office you run it out of -- then you should be able to claim a deduction based on the size of the space you use. Here's how it works:
The first way to use this deduction is the simpler way: Claim $5 per square foot of office space, up to 300 square feet, for a max of $1,500 in 2017.
The second way is more complicated, but will probably net a bigger tax savings: Let's say the space that you use for the business is equal to 10% of the square footage of your home, and your total qualifying household expenses -- including rent or mortgage, electricity, other utilities, and insurance -- are $20,000 for the year. You would be able to deduct up to $2,000 from your business income. This method takes a little more work, since you'll need to keep track of all the qualifying home expenses to determine your deduction. But in most cases, it will net you a bigger tax deduction.
Following the same method, you can also get a deduction if you have to perform repairs that affect your entire home, such as replacing a roof; just be sure to note that improvements are not repairs, and repairs to only one part of your home don't quality. For instance, things like updating exterior windows or plumbing repairs in your kitchen wouldn't qualify.
Lastly, the qualification for this deduction is that you use the space exclusively for your business. If it's also the guest bedroom and you only use the desk in the corner of the room, you could get in trouble if the IRS decides to dig a little deeper.
2. Cut your taxes when you buy certain items
There are basically two ways you can cut your taxes when you invest in new equipment or property for your business: depreciation, or the Section 179 deduction. The difference is relatively simple. Depreciation, which is common for many large, long-lived assets, is claiming a portion of the cost of that property each year over a number of years.
However, the Section 179 deduction, which allows business owners to deduct all of the cost (or a substantially higher portion versus depreciation), may be a better option. Not every item you buy qualifies, so check out the IRS website here for more.
3. A new way to lower your tax rate
Chances are, your from-home business is a sole proprietorship or other so-called "pass-through" entity, and all of your income will be taxed at individual tax rates. If that's the case, it could mean your business is taxed at a higher rate than the recently enacted 21% corporate tax rate. After all, once your taxable income reaches $38,700 in 2018 (if you're single), your tax rate will be at least 22%. If you're married filing jointly, that figure is $51,800.
The good news is that someone noticed that this would create unfair taxation for many small businesses, and Congress included the qualified business income deduction in the new tax law. Also called the pass-through deduction, this new deduction allows small-business owners whose income falls below certain thresholds to deduct an additional 20% from their taxable income. Depending on how much you earn and what type of business you run, this could put a lot of extra money back into your pocket come tax time.