Home Bakery Tax Deductions: What You Can Claim

Operating a home bakery qualifies as a business for tax purposes, allowing you to deduct expenses incurred to generate income. Properly identifying and documenting these costs reduces your taxable profit and is essential for accurately calculating your net earnings.

Common Operating Expense Deductions

The daily costs of running your bakery are deductible as business expenses, which are defined as the ordinary and necessary costs associated with your trade.

Cost of Goods Sold (COGS)

The cost of goods sold (COGS) includes all direct costs for producing your baked goods. You can deduct expenses for:

• Primary ingredients like flour, sugar, eggs, and butter
• Specialty items such as high-quality chocolate or vanilla beans
• Custom decorations
• Direct packaging like boxes, bags, and labels sold with the product

General Supplies

You can also deduct supplies that are consumed during business operations but are not part of the final product. This includes parchment paper, cupcake liners, piping bags, and cleaning supplies. Small utensils and minor kitchen tools with a useful life of less than a year are also deducted here.

Marketing and Administrative Costs

Expenses for promotion and administration are fully deductible. These costs include:

• Website hosting and online advertising
• Printing of business cards or flyers
• Fees for farmers’ markets or local fairs
• Payment processor fees and business bank account fees
• Business-specific software for accounting or order management

Professional Expenses

You can deduct professional and legal costs required to operate your business. This includes:

• Fees for necessary business licenses and permits
• Premiums for business liability insurance
• Continuing education to maintain or improve your skills, like a cake decorating class
• Courses on topics like small business accounting

Deducting the Business Use of Your Home

You can deduct a portion of your home’s operating costs if you meet the “regular and exclusive use” test. This requires a specific area of your home, often the kitchen, to be used solely for your bakery business on an ongoing basis.

Simplified Method

The simplified method allows you to deduct a prescribed rate of $5 per square foot for the part of your home used for business, up to a maximum of 300 square feet. The maximum deduction is $1,500 per year. This option is easier as it does not require tracking actual home expenses, but it may result in a smaller deduction.

Actual Expense Method

The actual expense method can yield a larger deduction but requires detailed records. First, calculate the percentage of your home used for business. For example, a 300-square-foot kitchen in a 2,000-square-foot home gives you a 15% business use percentage.

You can deduct that percentage of indirect home expenses, such as mortgage interest, property taxes, insurance, and utilities. Direct expenses that apply only to your business space, like repairing only the kitchen, are 100% deductible. This method also allows you to claim depreciation on the business portion of your home.

Claiming Vehicle and Equipment Costs

Expenses for large purchases like vehicles and equipment are treated differently from daily operating costs. These assets are expected to last more than one year and have specific rules for how their costs can be deducted.

Business Vehicle Use

If you use your personal vehicle for business activities like picking up supplies or making deliveries, you can deduct the associated costs using one of two methods. You must choose a method in the first year you use the car for business.

The standard mileage rate is a simplified approach where you multiply your business miles by a rate set annually by the IRS; for 2025, the rate is 68.5 cents per mile. The actual expense method involves tracking all vehicle operating costs, including gas, repairs, and insurance, and then deducting the business use percentage of those costs.

Equipment Costs

Assets with a useful life of more than one year, such as a commercial mixer or oven, are considered equipment. While these can be depreciated, small businesses can often deduct the full price in the year of purchase.

The De Minimis Safe Harbor election allows expensing items costing up to $2,500 per item. For more expensive equipment, Section 179 allows a business to deduct a much larger amount in the year it is placed in service, up to a limit of $1,220,000 for tax year 2024.

Essential Records for Substantiating Deductions

To claim any business deduction, you must have records to prove it. The IRS requires documentation that substantiates the amount, time, place, and business purpose of each expense.

General Record-Keeping

Keep all receipts, invoices, and bank or credit card statements related to your business. Opening a separate bank account is highly recommended to avoid mixing business and personal funds, which simplifies tracking expenses. Digital copies of receipts are acceptable and can be organized using a scanning app or cloud storage.

Specific Documentation

Certain deductions require specific records. For vehicle expenses using the standard mileage rate, you must maintain a log detailing the date, start and end odometer readings, total mileage, and business purpose for each trip. For the home office deduction under the actual expense method, keep all home-related expense records like utility bills, mortgage interest statements, and property tax bills. You also need a record of your home’s total square footage and the square footage of your exclusive business area.

Reporting Deductions on Your Tax Return

As a sole proprietor, you will report your bakery’s financial activity on your personal tax return. The final step is to report your identified expenses and income on the correct forms.

Primary Form (Schedule C)

Sole proprietors report business income and expenses on Schedule C (Form 1040), Profit or Loss from Business. Part II of this form is for expenses, with specific lines for categories like advertising (line 8), vehicle expenses (line 9), and supplies (line 22). Your Cost of Goods Sold is calculated in Part III and the total is entered on line 4.

Associated Forms

Some deductions require their own forms, with the final amount transferred to Schedule C. If using the actual expense method for your home, you must complete Form 8829, Expenses for Business Use of Your Home; the total is entered on line 30 of Schedule C. Deductions for depreciation and equipment are calculated on Form 4562, Depreciation and Amortization, with the totals also flowing to Schedule C.