In making the most of your annual tax filing, it is important to know what you can and cannot list as deductions on your taxes. Like most Americans, I have a side hustle, a way to make money outside of the daily grind. Did you know you can claim tax deductions for your side business you run out of your home? Could you be claiming more than you are?
So You Have a Side Hustle!
Lots of Americans do! Whether it is selling Scentsy or ITWorks, you are doing it to help reach your financial goals. You might be savings for a cruise or paying down college debt, but either way you are using part of your home to generate income. You do your time at the 9-5 and all along you are using your cell phone to tweet, check emails and use Instagram to talk about your side gig. Did you know that because you use your cellphone to help your side business run, that your cell phone bill could be tax deductible?!
Well true, but not completely. Unless you have a designated cellphone for work only, only a portion of your personal cellphone bill can be claimed, but as with any tax deductions they all add up!
What Else is There?
Well let’s think… what are all the expenses that a home office has that you have in your home that could be tax deductible. An office usually has restrooms, so running water for the toilet and sink could be part of a tax deduction. Obviously, heating and air-conditioning are used in places of employment along with electricity and the Internet. These are just a few things that can easily be added up to figure out what an annual deduction could be for your home office.
Math is Hard
Most people aren’t good with numbers, so we will break it down saying easily for you.
Let’s say you have a 1000 square foot home and your home office is in a room all by itself, lets say it an 8×10 sq ft room, so 80 square feet. You take the space in your home and create the office space as a percentage of the total space in the home, so in this case the home office is 8% of the home. This means that if you have been running your side business out of your home for the entire year, you can deduct 8% of the year’s electricity bill, water/sewer bill, Internet bill and gas bill. Based on the chart figures below you can reduce your taxable income by $293 because you work your side hustle out of your home.
This may not seem like a lot, but as mentioned before it all adds up! Itemizing for the case above in the chart is not the best method, but it is good practice to know whether or not itemizing provides the highest tax deduction. According to NerdWallet.com the IRS will give you a flat $5 per square foot on your home office deduction if it is less than 300 square feet, allowing you to deduct without having to do the math listed above. If your home office is more than 300 square feet, sorry you have to do the math… So for our 80 square foot office, it is better to use the flat $5 allowed by the IRS than to itemize our bills. We get a $400 tax deduction by not itemizing in this instance.
Is There More?
What about the maintenance of your home when you have a home office? So does that mean my home warranty service plan is tax deductible? Well it very well could be! According to TurboTax you can also claim your homeowner’s insurance premiums, HOA fees, any security service you pay for, home warranty service plan and other repairs and maintenance of your home because of your home office. These are indirect expenses of your business, but they can still be claimed under the current tax law.
Working for yourself in your side hustle can definitely help you generate some extra income, but it can also help you deduct more expenses from your tax return as well! Deducting part of your home expenses is far more affordable than to rent an entire office space somewhere. Be sure to check with your tax accountant before claiming any deductions on your home or its expenses, as with any IRS tax law, there are exceptions to the law.
This article is not meant to provide you with personal tax advice, but to inform you of the possibilities of tax deductions related to your side hustle or small business you run out of your home. You should always talk to your tax professional before claiming deductions on your home expenses to ensure that you are following the tax law correctly and that you do not unknowingly claim a deduction to which you are not eligible.
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