Episode 150: Home Office Deductions

On this episode of the podcast I answer your home office deduction and other small business entity questions from my Friday Facebook Live.

This episode is brought to you by my FREE Tax Challenge. Taxes suck but we all have to file them. I'll walk you through the 5 steps you need to get your tax documents organized and ready to file. Sign up for this free challenge.

Here are this week's questions:

1. What's the biggest financial mistake you see sole proprietorships make in their first year? - submitted by Annika P

Short answer: not paying quarterly taxes. People get in the "oh shit" cycle of not saving for quarterly taxes, getting caught off guard, then getting behind on paying them.

2. When I created my LLC  I set it up as a partner LLC with my husband and me. Was that a mistake? He's going to help me with things once I get everything up and running. You mentioned something about a single-member LLC and now I'm wondering if I messed up. We haven't really gotten far with things. I sold some physical items in 2019, I didn't sell in 2020 and now I'm getting it back up and running again. So if I need to make changes/corrections, now would be the time before I get things going - submitted by Ally T

Generally it's easier to form a single member LLC because you don't have to worry about the operating agreement, meeting minutes, and all these other details. If you are doing married, filing jointly on your taxes, this is a question for your tax accountant but generally you can file as if you are a single member LLC because your income is considered joint. Look into it though because technically if you have a partnership or multi-member LLC you need to file a partnership tax return before you file your individual return. Best to ask your tax preparer.

3. I filed a Trade Name last night for my blog. So the LLC is the Etsy store and then the DBA is content creation and marketing etc. I think that will work but would love feedback to make sure! - submitted by Ally T

You can do that. There's always the question of do you want to have one business with multiple DBAs or do I want to have multiple businesses. Really you can do it either way. If you have multiple LLCs if will provide you more legal protection.

4. I'm a website designer who works from home. Can I deduct a fancy espresso machine? Even like 50% of one? - submitted by Beth M

Probably no. Anything you're buying from the home usually cannot be deducted unless you are only strictly using it in your home office and not using it for personal use.

5. If we offer free delivery, we track and deduct the mileage for taxes. My question is regarding when we charge the customer a delivery fee... is that mileage still deductible, or no because it’s not really our expense anymore? - submitted by Lisa B

Yes, you can still charge them. In this context I would think of your delivery fee as more of your time delivering and less of just the hard cost.

6. As a freelancer, do I pay state tax only to my state, or do I need to file a form for each state that I have a client that sent me a 1099? - submitted by Emily R

For income taxes you only need to worry about your source of income, which is generally where you are physically located. This can get tricky if, for example you live in New Jersey and drive to New York every day.

7.  I heard you can deduct your totally dedicated home office space per square foot- how does that work for mortgage as opposed to rent? - submitted by Annika P

Owning or renting does not matter in this scenario. You get to deduct your utilities and home costs as a percentage. If your home office is 20% of your square footage, you get to deduct 20% of your expenses.

8. I’m in the beauty industry and am licensed to preform the services I offer. I rent a small studio independently and have a separate license to practice out of this space (all through the Board of Cosmetology). Do I need a business license on top of this? Also, I formed an LLC when I started working for myself and use my social as my EIN, is that okay or would you recommend a proper EIN #. - submitted by Elise M

Yes, you do need a business license on top of that. EIN (Employee Identification Number) is not the same as your social security number. EINs are more for a safety and security issue so you aren't always using your social security number.

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