There are many reasons to start a small business, perhaps even more so during this pandemic. Are you one of the 25% of working women considering a career change due to COVID-19-related impacts? Have you been laid off and are thus wondering if now’s the time to pursue your entrepreneurial dream? Are you an innovator who sees a new business opportunity amid a recession? Do you want to take charge of your future income while keeping your day job?
Flexibility, being your own boss, seizing new opportunities, and creating an income stream for the next phase of life are all valid reasons for owning a business—and if you shift that idea to become a home-based business, you may be able to add “save on taxes” to the list of perks.
Save on Taxes With a Home-Based Business
How exactly can you save on taxes with a home-based business? The theory of taking a home office deduction is simple, but you should still consult with your accountant to ensure you’re in compliance with current IRS regulations.
Speaking broadly, the space you use as your home office could qualify for a deduction if it meets 2 criteria: “regular and exclusive use” and “principal place of your business.” If you answer yes to both of those criteria, then you may be able to take tax deductions for a percentage of your mortgage (or rent), utilities, home insurance, property taxes, mortgage interest, and repair expenses.
You can’t deduct the entire cost of your mortgage payment or utilities, as that would mean you operate an office building rather than a home—but the 100 square feet of your living room that you use exclusively for your home-based business could qualify for a write-off. Similarly, it’s possible to deduct a portion of the cost of personal assets, like a cellphone or laptop, if you have records showing what percentage of usage was for business use.
Don’t overlook this write-off even if your business provides offsite services (e.g., a cleaning business). If most of the business’s administrative tasks, like scheduling, invoicing, and marketing, are done primarily at your house, then you may still qualify for the home office deduction.
Keep in mind the “3-of-5” test when calculating deductions. Generally, the IRS expects a hobby or small business to have earned a profit in 3 of the last 5 years. If you’re claiming a home-office deduction but your business has been in the red for 3 consecutive years, be prepared to prove that you aren’t scamming the system. The IRS may require additional documentation to show that you’re running a real business (just not a profitable one—yet) and therefore qualify for the write-off.
To protect your business, track and categorize your business expenses and your year-end depreciations carefully. Your tax preparer will appreciate the records, and they could come in handy for any questions the IRS might have.
Ideas for a Home-Based Business
So you’re eager to carve time out of your day to build a home-based business. What type of business should you start? The answer depends on your skillset and your interests—there are many options to consider.
Your craft hobby could become your business. Do your friends and family rave about the table you refinished, the necklace you created, or the dog bed you built from recycled pallets? Maybe that’s a signal that you could find customers outside of your immediate circle by setting up an Etsy shop.
Your current side hustle may be your gateway to becoming a small-business owner. Do your neighbors hire you as their personal tailor every time they need their pants hemmed? Are you known as the custom curtain-maker within your church? Take some time to evaluate if it’s time to up your game and turn that side hustle into a full-time at-home business.
If you are a foodie, then a home-based food business may be right for you. Don’t limit yourself to baking birthday cakes and holiday cookies—other delicious options exist, like selling jarred fruit preserves made from your great-grandmother’s recipe. Or in this age of social distancing, you may find a niche market preparing meals for families or seniors. Just don’t forget that food-preparation businesses have additional state regulations to consider.
A cleaning service permits you to pick and choose your clients and your hours. Even if businesses have fewer staff in their office buildings due to pandemic-related social distancing, that doesn’t negate the need for cleaning companies. You could target employees working from home who want to outsource housecleaning so they can focus on assisting their children with distance learning.
You could establish a freelance business that provides remote services like management consulting, customer service, or a number of different jobs in the telehealth industry. Freelance job boards can help to connect you with potential customers.
Do you love to shop? Are you an expert at hunting down steals at garage and estate sales? E-commerce is here to stay, so consider building an online store to flip your goods.
Are you willing to open your home to children or adults in need of daytime care? The closure of many public facilities or schools has families searching for alternative options. Just be sure to check for the additional regulations and licensing required for this type of business.
If starting from scratch seems too daunting, you could open a home-based franchise business. Obviously, buying a McDonald’s franchise won’t fit the at-home bill—but other affordable franchises might, like the JAN-PRO Cleaning and Disinfecting franchises.
These are only the tip of the iceberg for home-based business ideas. Brainstorm your passions and your strengths—you may discover more possibilities.
An At-Home Business Is Still a Business
Even if you spend most of your time working in your bunny slippers, your home-based business is still a business. All the usual business setup applies, like accessing financing and creating a business plan. To take advantage of home-office deductions on your small business taxes, keep good records and stay on top of your bookkeeping. Rest assured, you don’t have to do it all yourself—Sunrise offers bookkeeping services and tax assistance.
Take the plunge and start the process to take advantage of tax write-offs for your at-home business.