Having Your Own Home Business May Also Offer Tax Advantages!
Have you thought about starting a home business to help with your tax burden?
Small business and real estate tax deductions can save you thousands of dollars per year on taxes.
Make a small home-based business work for you and your personal finances by taking advantage of the many tax deductions. The advantages may otherwise be unavailable to you, were you not running a business from home. Real estate investing is especially rich in tax benefits, as nearly all expenses are tax deductible
For example, you can take advantage of tax cuts not available to the average homeowner by writing off portions of home expenses. When you dedicate a part of your residence to business space, an office for example, it opens up the door to tax advantages of your property.
What expenses are tax deductible?
Some of the best tax deductions include:
Home Office Space and Mortgage Deductions
Home business tax deductions are based on the percentage of the home devoted to business use. This can be measured by the total square footage of your home to office space ratio. Be realistic though as falsifying this number could result in an audit. Mortgage debt incurred after December 2017 is deductible up to $750,000 - (Rental property loans are unaffected). This is heavily scrutinized, so proceed with caution.
Homeowners Insurance/ Mortgage Insurance deduction
Individuals cannot do this, but Small businesses can! Based on the home office space percentage you can write off a portion of your home’s Insurance.
You may be able to write off a portion of your Homeowners Association fees if you live in an area that has an HOA. Every little bit helps! If you own rental property as part of a business, you still qualify.
Hire a janitor to come and clean your office space (AKA home). Again, this is a proportional deduction. If not, keep receipts of cleaning supplies and deduct those instead. Each dollar on your bottom line adds up and increases profits.
Mortgage Interest Deduction
Proportional interest can be added to your business filing.
Repairs and Maintenance
Painting, shelving or lighting installations to the home office can be written off, sorry, the new pool cannot be.
Proportional electricity, heat, water, internet, and waste management can all be deducted.
Entertainment for customers and clients
Often, dinners and client meals can be written off as well. The rules have tightened on these expenses so be sure to keep receipts with any communication about meals or client meetings with entertainment or food.
From paperclips to computers and program expenses, if you can clearly show it was for the business portion of your home, you can deduct at least a portion. Keep all those Office Max receipts.
What Marketing and Development costs of your business are tax deductible?
Conventions, trade shows, and education as it applies to the role within the company are deductible.
Advertising costs vary from printed ads to website or television, but you can make these deductions.
Promotional sponsorships for a team or trade show can also be deducted.
Consultant, Accounting, Legal, Real-estate agent, etc. are deductible from your taxable income for your business.
Travel for business is often necessary for growth, especially in the real estate investment industry. Airline travel for employees or yourself, including hotel stays and 50% of your meals. Rental cars and fuel only associated with the business portion of your trip can also be deducted.
Documentation is vital here as everywhere. Tread with caution as this is scrutinized and document meetings and correspondence with any real estate agents and all listing information. Cover your butt, lest you be audited.
If you use your personal vehicle for business some of your vehicle costs can be deductible. Car loans or lease payments, as well as insurance, can help reduce your tax burden. A percentage of these costs can be deductible. Mileage costs at the standard 54 cents a mile from home office to a client or other business activity. Also, keep a tab on those parking receipts and tolls. Every little bit matters, all is business related expense.
Real Estate Tax Deductions
Unique opportunities for Real Estate tax deductions make starting and running a business full of advantages. The significant upside being the tax benefits of owning a business without self-employment taxes. Thanks to the Tax Cuts and Jobs Act of 2017, rental income is free from FICA taxes.
The TCJA tax bracket has lower tax rates than before, and it is a great time to take advantage. This bracket is current until 2025.
The following Rental Property tax deductions come directly from your taxable income. This enables you to take the standard deduction still.
Losses from Theft or Casualty
Properties can be damaged by renters or losses can occur through criminal activities. Don't lose out twice, recoup your losses through tax deductions.
Depreciation can be spread over 27.5 years or 1/27.5 each year. This includes capital improvements that must be depreciated (i.e., parking lot, roof, windows).
Repairs and Maintenance
You're able to write-off basics like paint and carpet for rentals.
Gas, water, electric and more can be deducted from your rental property.
These real estate fees are unavoidable but some are deductible, and other depreciate over time. You’ll need an accountant who understands real estate to guide you.
Premiums for both rentals and landlords are tax deductible.
Interest and Mortgage
All rental property interest on loans remain tax deductible.
Renting to the wrong person can cost you more. Write-off your background or credit check expenses or software.
Some forms are complicated and require the help of legal professionals. Be sure to deduct the cost to draft eviction paperwork, lease agreements, articles of incorporation etc.
Owning your own home-based real estate business has some fantastic rewards. With so many ways to hold on to the money you invest it makes ownership even more worthwhile. There are so many tax benefits of rental property, when you manage the business yourself. Use some of the tips in this article to increase your profits at tax time. Then, use the PMBO vacation rental management software to maximize profits on the front side.
Build your empire and protect it by saving all your receipts, bills, invoices, and transaction communication. If you can only do one thing in an organized fashion, make it your financials. Buy an expandable folder and use the above categories to store all paper. Your accountant will appreciate it, and it will save you money and protect you should you get an audit.
Working from home, owning a business, and making and keeping more of your earned income is all possible. There won’t be more land, so real estate investments are a great way to earn a sustainable income and ease your tax burden while living a life you want. Still wondering if you can make money with vacation rentals? Check out our blog – Are Vacation Rental Properties Profitable?