As a small business owner, you probably have lots of deductions for your business. But are you taking all the deductions? There are probably deductions you don’t want to make because 1. you don’t have the paperwork to support it or 2. You have paperwork, but it’s so disorganized that you just don’t have the time to sort them. To make your life a little easier this time of year, I created this post with business deductions tips to make this process simpler to manage.
First, use a software like Quicken or QuickBooks to track your expense transactions. In Quicken, create a business category, under the new category, then write in the category name and write a brief description to remind you what it is for and then, check the box that says “tax-related category.” This way, when you print out your end of year tax report, you will easily see all the items you have in a lump sum and individual totals.
One of the biggest deduction mistakes mompreneurs make is that they don’t take the home office deduction. Note: You can’t deduct a home office if you have a shop or another place you do business the majority of the time, however. But, if you regularly use a particular room in your house as an office, you can take advantage of this deduction. Here are some tips on how to deduct your home office in the more honest and accurate way.
Start by gathering receipts for these categories and placing them in folders.
Real estate taxes
Insurance (fire, theft, flood, property) – feel free to split this out into individual folders.
Utilities (heating/cooking, trash removal, water delivery) – feel free to split this out into individual folders if you like.
Along with home office deductions, there is always a question what can you deduct under home office repairs. If you have questions, contact your accountant right before you do a project and they can give you a clear answer on if the repair is deductible for your business. I have seen many clients that think their repair is deductible come to find out that it is not.
If it is deductible, keep track of the home office repairs in your account register. In Quicken, add an account for “home office repairs.” Be sure to check off the “tax-related category” so it appears on your tax report. Then when you add repair transactions, use this category. Some examples of home office repairs would be painting your room. Changing the carpet. Installing a door. Fixing the floor. Repairing a wall.
It’s important to remember that you need to have backup paperwork digitally or in paper form for all the deductions you use for your office. It can be paper receipts or digital receipts.
So, keep paper receipts organized. The best way to keep your papers organized is to create a “Tax Return deduction” organizer. The least expensive way to do this is by using a hanging folder with subfolders for each deduction. For each manila folder inside, write down one from this list on each folder. If you want to have individual folders for your utilities, feel free to do that as well instead of writing “utilities”.
How to make a tax return deduction organizer
Depreciation and Section 179
Meals / Entertainment
Home Office Deduction
Home Office Repairs
Utilities – split this out into other folders as needed.
Real estate taxes
If you don’t want to use a hanging folder inside a filing cabinet, you could use two(2) 13 tab accordion folders. I prefer the ones that stand up like this one. Then at the end of the year, you can buy a new one and file the entire accordion folder away with your other tax paperwork.
If you prefer not to keep bills in paper form, you can also make a directory called “Tax Return Deduction copies” on your computer and then create folders for each of the listed items above. Then, if you have a question or get audited, the digital bills are already organized for you.
If you need additional information on your home office deduction, check out these links below.
Well, there you have it. I hope this helps you with your home office and business deductions. Remember, having a system you can use each year will eliminate the guess work on where you placed a bill or invoice.