Tax deductions for home-based businesses

We can’t avoid many things in our life – winter, summer or tax season. Every time you start to receive W2 forms from your clients, you understand that it is necessary to start thinking about filing your taxes. This process doesn't have to remind a post-holiday hangover. Even if you run a home business, there is a legal way to reduce the amount of burden necessary to meet your tax responsibilities – tax deductions. 
The first way to reduce what you owe to the IRS is to take advantage of all possible tax write-offs. The following samples will help you understand what tax deductions are available to freelancers and home-based businesses. Check that you remember them all before filing your taxes! Who knows, maybe it will help you save several hundred dollars for making your business grow. 
• The home office deduction. If you use part of your home for business, you may be able to deduct a portion of your expenses (adequate to the size of space used to operate your business). These expenses may include mortgage interest, rent, insurance and depreciation. The home office deduction applies to all types of homes, from apartments to mobile homes. 
Generally, home office deductions are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for business operations, you need to figure out what percentage of your home is devoted to business use.
In order to claim the home office deduction, you need to use part of your home exclusively and regularly as the principal place of your business, as a place to meet with your clients or as the storage of your products.
• Improvements to your home-based office. If you had to repair your home-based office, for example paint the walls, then you may be able to deduct the cost of those improvements on your taxes. However, don’t run to extremes: it doesn’t mean that you your expensive hi tech renovation can be considered as a business expense. 
• Utility, telephone and Internet bills related to your business. The utility, telephone and Internet bills may be written off on your taxes, at least partly, if you are using them for business purposes.
• Equipment purchased for business use. There is probably some equipment that you bought to run your home-based business, for example a new computer, scanner or color printer. These purchases can be considered as business expenses, so you can deduct them on your taxes. 
• Business use of your car. Meeting with current and potential clients is an important part of many businesses. If you are driving to those meetings, you can deduct car-related expenses such as gasoline, tolls, parking and garage fees, depreciation and repairs, license and registration fees. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. 
If you don’t have a car, you can deduct the cost of your bus (train, tram, etc.) tickets. 
• Business trips. If you took any business trips in the past year, then you can reasonably ease the costs with travel-related deductions: hotel bills, meals, transportation, phone calls and dry cleaning. If you gave a presentation during your meeting, you may be able to write off the cost of shipping your materials and equipment. 
Keep in mind that there are two types of business trips for freelance employees. The first one is a trip intended solely for business purpose. The second one is a trip that was taken partially for business and partially for pleasure. So it will matter what type of travel expenses you want to write off. 
• Services used for your business. If you needed assistance of a tax consultant, attorney, accountant or any other professional then don’t forget to include those costs to your business expenses. 
If you have any expenses associated with searching for a new job in your present occupation, including subscription to paid freelance sites, they may be also deducted on your taxes.
• Interest on business loans. Did you take out a business loan to start or expand your home-based business? If you are in that boat, you may be able to deduct the accruing interest on that loan.
• Payment you have not received. You know that payment scams happen in freelance business. Or some companies may go out of business. Did any clients fail to pay for your services in the past year? If that amount was previously reported as gross income, you might be able to deduct it because you didn’t receive that money.
• Daily expenses on items needed for business operations. You may be able you write off your day-to-day expenses necessary for your business activities: fax paper, pens, staplers, stamps, etc. Keep in mind that you need to keep the receipts to prove that those purchases are made for business use. 
• Business-related books or subscriptions to professional journals. If you buy any books or subscribe to paid websites to maintain or improve your professional skills and knowledge, these costs can be considered as business expenses. 
• Bank fees. It’s not a secret that banks charge fees for transactions. Do you use PayPal in your work? It charges rather high transaction fees, so you may be able to deduct these expenses on your taxes. 
• Storage costs. People who sell items from home may include their storage costs in the total deduction. The expenses should be adequate to the size of space used to store goods related to your business. 
• Cost of material for making goods. If you are selling items that you make at home, you may deduct the cost of products or raw materials, including freight, used to make those items. 
• Payment to employees or subcontractors. If you have delegated part of your work to other people and paid for their services, you may be able to write off the payment you made to your subcontractors.
• Insurance expenses. Most insurance premiums related to your home-based business are deductible. They include home insurance, car insurance and travel insurance that was purchased for your business trips. Analyze all forms of insurance that you purchased and decide whether or not they are related to your business. 
• Retirement plan deductions. Retirement plans are savings plans that offer you tax advantages to set aside money for your own (and your employees') retirement. So if you are a self-employed individual, then you may be able to take advantage of retirement plan deductions.
• Business gifts. If you purchase gifts for your clients, you may be able to write off these expenses when you are filing taxes. However, don’t use this idea too often.
The number of people who work from home is rapidly increasing, so these tax deduction tips apply to more people now than ever before. However, keep in mind that the tax write-offs are not intended to be applicable to all freelances or home-based businesses. The circumstances of your situation will determine whether or not you may qualify. Tax laws are rather complicated, so you may need to consult with a tax professional to find the right solution for your particular home-based business. 

Additional information:

• Visit IRS.gov (keyword search Business Expenses) for more information on deductible home business expenses.
• The IRS Criminal Enforcement web page provides additional information on home-based business tax avoidance schemes and other related issues.
• Publication 587, Business Use of Your Home (PDF).
• Publication 463, Travel, Entertainment, Gift, and Car Expenses (PDF).
• Publication 334, Tax Guide for Small Business (PDF).
• Publication 17, Your Federal Income Tax for Individuals (PDF).
• Bartering Tax Center  
• Online Auction Sellers Tax Center