Five Tax Breaks For Your Home Business

Here are five deductions homebodies would be foolish to ignore. (The last two also apply to any small-business owners.) To increase your odds of success, be sure to keep your business and personal life separate–including all checking accounts, credit cards and phone bills.

Infrastructure (utilities, phone service, housekeeping services, landscaping) To calculate the percentage of these “indirect expenses” that is tax-deductible, determine how much of your house is used as office space. If your office takes up 200 square feet of your 2000-square-foot home, you can theoretically deduct 10% of these expenses. The IRS doesn’t require the area be confined by walls–only that you spell out why you call it an office.

Home mortgage interest and property taxes
U.S. taxpayers can deduct these anyway, but as a small business owner, you can save even more by applying a percentage of mortgage interest and property taxes to the home-office section of your tax form. Deductions for mortgage interest and property taxes are capped, but there are no limits on the home-office portion.

Travel expenses
If you work from home, you can deduct the costs of traveling away from your home for any business-related activity. Take the percentage of miles traveled for work and deduct that proportional amount from what you spent on gas, oil changes and repairs. Keep mileage log and writing down the purpose of every trip and the date in case the auditors come calling.

One-time office equipment purchases
Section 179 of the tax code says you can take a one-time deduction–up to $105,000–for the purchase of office equipment, as long as you don’t purchase more than $400,000 of equipment in a calendar year. That’s nice, but many startups don’t generate enough pretax income to get the full benefit of the deduction. Married entrepreneurs have an edge: If one spouse spends $10,000 on equipment, but only brings in $5,000 in pretax income, he can still apply that entire $10,000 to the couple’s joint tax return.