3 key tax tips for the home-based business owner
Everyone does their taxes, but depending on what you do for a living (and in this case, where you do it), everyone does taxes differently. Doing taxes when you own a business will be unlike doing taxes as an employee. And doing taxes when you own a business that’s based out of your home will vary even more than if you were doing them from a commercial building or storefront with a lease. If you’re an entrepreneur lucky enough to work out of your home every day, make a note on these tax tips to make doing your taxes a smoother process!
Keep the S-Corp Election in mind
For all businesses formed as S-Corporations, you already know that your entity is really a C-Corporation with an S-Corp tax election – purely a tax filing overall. So this type of election is for all home-based business owners who are currently filed as a C-Corporation but don’t want to be subject to double taxation. This entity basically tells the federal government that the business would like to be taxed as a partnership, instead of a corporation. Being taxed as a partnership means your business will only be taxed at the shareholder level, rather than a typical Corporation taxing which taxes a business both at the corporate level and again when distributions are made at the individual level. In order for your status as an S-Corp to be put into effect, you will need to file Form 2553 and elect “S” status about two months and 15 days after the start of the tax year. As mentioned on the SBA website, not all states tax S-Corps equally so be sure you know what the individual requirements with your state are.
Simplify the home office deduction
As of tax year 2013, anyone who uses their home for work purposes can now opt for the simplified option of the home office deduction. This option, as stated by the IRS, ensures the standard deduction of $5 per square foot of home used for business (with a maximum 300 square feet), allows for areas like mortgage interest and real estate taxes to be considered home-related itemized deductions claimed in full, and no home depreciation deduction for the years this option is used.
For those using the regular method of home office deduction, you’ll have to determine the expenses of your home office based off of the percentage of your home that is devoted to business activity use, be it several small bedrooms converted into offices or a broom closet you type in. I recommend using Form 8829 to get started. Overall, however, the regular method is a lot more difficult to work with than the simplified option!
Do your taxes in some peace and quiet
Working from home means having the ability to drown out the background noise almost to a science, but doing taxes is still different than working. Sure, you can send out 15 emails while you cook breakfast for the kids, but can you file your taxes while scrambling eggs? You can’t put your returns on autopilot – taxes require a few hours of concentration and a few more hours beforehand of paperwork prep too. See if you can have a family member take the kids out for a day at the park so you can have the house to yourself and really be able to sit down and focus. Close all other open tabs on your computer to avoid getting sidetracked and get cracking on your filing – the last thing you or your business needs is to fall behind and risk not making the April 15th deadline!