Work From a Home Office? Tax Tips You Have to Know
October 22, 2018
By: Cathie Ericson
Tax season is around the corner (yes, again), and small business owners who are filing taxes for 2018 will have a host of new rules to pay attention to. That’s because the “Tax Cuts and Job Act” tax law introduced a series of changes that entrepreneurs with home offices should be aware of.
Here are some tips to fine-tune your tax planning to set you up for success by the time tax time rolls around this year.
1. Carefully track allowable deductions
Now is the time to create a robust organizational system to efficiently track allowable deductions. Consider taking your receipts out of that shoebox you’re storing them in, and try to invest in folders and other organizational tools that will make it easier for you to reconcile your deductions come tax season.
Small business owners or independent contractors—essentially anyone who files a “Schedule C Form 1040”— are eligible to earn a deduction for business expenses, so it's important to track these diligently. It's very common for small business owners to forget some key ones, says Josh Zimmelman, owner of Westwood Tax & Consulting in Manhattan, N.Y. He suggests making note of potential deductions including:
Office furniture used exclusively in your home office
Computer and other technology used in your home office
Transportation costs, such as driving to a client site for outside meetings
A proportional percent of household expenses, like phone, internet and utilities that can be allocated to your “place of business” (i.e. your home office)
Expenses for professional development or dues for memberships in professional organizations
Try to carefully save your receipts. "The IRS will not accept credit card statements as back-up because they do not show itemized details of what was purchased," says Steve Wolpow, partner at Nussbaum Yates Berg Klein & Wolpow in New York City.
2. But don’t overreach or you could risk an audit (and fines)
As part of the new tax law, work-from-home independent contractors can no longer receive 50 percent deduction for client entertainment,says Wolpow. "This is a big change and not favorable for business owners who rely on entertaining clients as a key business generator."
Try not to pass off normal everyday expenses as “work expenses.” For example, you can’t deduct travel that isn’t for a specific work event, or expense clothing purchases that you would use for everyday wear, notes Zimmelman.
3. Double-check that your home office deduction is allowable
Your “home office” must have “regular and exclusive” use as a home office, as opposed to a room that also serves other functions, such as your den or bedroom.
It must be your “principal place of business.” In other words, if you have a dedicated work space in your company’s office but often work from home, you may not take the home office deduction. This rule is even more important in 2018, when the home office deduction is removed if you’re a W-2 employee—which means you may be a telecommuter, but are not technically “self-employed.”
4. Make sure you have separated personal and business spending
"Too many freelancers miss out on deductions because their finances are not organized," says Zimmelman. "Separating your expenses from the start can make filing your tax return so much easier." He recommends that work-at-home professionals open separate accounts for banking and credit cards, which can make it easier to track which expenses were for personal use and which can be deducted on your 2018 taxes.
About the Author
Cathie Ericson is a freelance writer covering business and consumer topics. She creates branded content for Fortune 500 companies, and her work has appeared in LearnVest, Costco Magazine, Forbes, TheGlassHammer.com and IDEA Fitness. Follow her @cathieericson.
All content provided herein is for educational purposes only. It is provided “as is” and neither the author nor Office Depot, Inc. warrant the accuracy of the information provided, nor do they assume any responsibility for errors, omissions or contrary interpretation of the subject matter herein. The information should not be relied upon as replacement for professional tax advice.
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