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Understanding tax deductions for online home businesses

Written By: Dawn Turner

Tax deductions for online home businesses are very similar to those of almost any small business. One of the biggest benefits, however, that business owners have when running their business out of their home is the ability to claim a deduction for their home office. The main requirement to be able to claim this deduction is to have a room that is solely dedicated to being an office for the business. This means the room cannot be used as a play area for children or a spare bedroom for guests.

Deducting for Home Office Made Easier

In the past, the Internal Revenue Service (IRS) required home business owners to file Form 8829 in addition to Schedule C for those claiming as self-employed. This form was burdensome because it required individuals to fill out this 43-line form with information pertaining to their mortgage, rent, depreciation, and utilities for the year. These expenses then had to be separated and allocated to business and personal use categories.

For the 2014 tax season, the IRS now allows an easier option to claim the home office deduction located on Schedule C, Line 30 for those who file as self-employed. This option reduces the amount of paperwork and records that need to be kept by individuals who choose this alternative method. Instead of calculating the allocation of expenses to business and personal use, the square footage of the home office is multiplied by $5 to determine the filer’s home office deduction. This deduction is capped at $1,500.

The downside to the newer method is that filers cannot claim depreciation for the amount of space used for their office in their home. However, the added benefit is that they can claim their real estate taxes, mortgage interest, and any home insurance losses without having to distinguish between business and personal use. For those who wish to file the deduction in the same method as in the past, the old method still exists and is referred to as the standard method.

Additional Deductions to Consider

Home business owners, regardless of whether their business is online or not, are still entitled to many other deductions when it comes to taxes related to their business.

  • Website building and hosting fees: Online home business owners can deduct these costs, as they are necessary expenses to running their online business. 
  • Internet and telephone expenses: Realistically, a household will have one Internet service and perhaps a dedicated phone number for business use. The portion of these services that is devoted to the home office is deductible.
  • Legal expenses, professional fees, or association dues: Legal and professional fees are deductible, provided they are not related to startup expenses. If they are, the business owner may be required to amortize these costs over a five-year period. Association dues may need to be calculated into a percentage if the association is involved in lobbying or political contributions.
  • Startup or expansion expenses: The expenses related to starting up a new business can be deducted on that year’s taxes in addition to expenses related to expanding the business. 
  • Supplies, equipment, and furniture: These office expenses often either can be deducted or depreciated depending upon the better tax benefit of the two.
  • Car expenses: Business use for car travel related to the business can be deducted by either taking a standard deduction for amount of miles traveled or by using the actual expense method.

These are just a sampling of the many tax deductions available to online home business owners. Understanding the tax deductions that are available for home businesses can help business owners recoup a portion of their yearly business expenses. Therefore, it is always advisable to contact a tax professional for advice for any deductions that may be unclear.