Taxes and your Home Based Business Deductions
By: Lynda Radican
Americans over pay billions of dollars each year in taxes because they get bad advice or try to do their own taxes.
The IRS recognizes two types of taxpayers: the employee and the Business owner. Home based business owners have equal access to most of the same deductions that big business has.
An employee first Earns, then pays the government and then gets to spend what is left.
A Business Owner Earns, then Spends (expenses) and then pays taxes. Smart business owners can get their taxable income down to 10% or below. But showing profit is key to establishing your business.
Step 1. Get a knowledgeable tax preparer
Having an enrolled agent prepare your taxes can be a real asset as they can legally represent you in tax court. Not all CPA’s understand Home Based Businesses. Remember that CPA’s can fail all questions on taxes on their exam and still pass. So interview prospective tax preparers. Ask them how they feel about Home office deductions. These are no longer the red flags they used to be as the IRS has become more supportive.
Step 2. Keep your business income separate from your household or personal income.
Commingling of Funds is a major IRS no-no. To qualify as a business, you must keep funds separate. Get a second personal checking account and a credit card to use solely for business.
Be sure to deposit all profits into that account and if at first you need to fund your business with personal monies, make deposits and keep track of these as personal loans for your business. Never deposit business checks into personal accounts. Make payments on your business expenses including your business credit card from this second account.
Step 3. Keep good records. Good records are the key to your success
In keeping records, one of your goals is to take current taxable income and shift it to non-taxable income through legal deductions. (Be sure to clear all deductions through your tax preparer.)
- Business start up expenses—Obviously your New Consultant Kit and Launch Sampler are start up expenses, but you can also take fair market deductions for any office equipment that you previously owned and have transferred into your business such as computer, fax machine, printer, furniture, pictures on the wall, phone, etc. To transfer current personal items into business use, have your business pay your household account fair market value (not what you originally paid). Be sure to list each item and list its fair market value. You can also take pictures of each item and place in your tax record.
- Car Mileage—Keep a separate log in your car to track mileage. Check with your tax preparer for the most recent mileage guidelines as these change from year to year. Generally, commuter miles (those to and from work) do not count but on days you don’t go to a job, all mileage used for business is deductible. Get in the habit of having your oil changed at the beginning of the New Year to get a verifiable record of your mileage for your records. Then get smart about your comings and goings. For example, on the days you go to work, make a stop close to home that could be considered business related. (This then becomes your commuter miles and the rest is deductible.) Repeat this on the way home. Jot down activities in your mileage log
- Home Office—Determine the percentage of your home used for business. The best option is a separate room used only for your business and can not contain a bed. But it can be as small as a corner in your family room with your personal desk. Now that same percentage of your mortgage, home maintenance fees including lawn care and housekeeping and utilities can be deducted.
Here are some guidelines taken from “Ask the Small Business Advisor” Stephen Windhaus at Bankrate.com (See Attachment)
An outline of some of the basic requirements to secure deductions on a home-based business:
- The workspace must be your principal place of business.
- With exceptions, the home work place must be acceptable to receiving clients and customers on a regular basis.
- The home office is used exclusively and regularly for the administrative and managerial activities of your business.
- There is no other location where the administrative and managerial activities are conducted at a level defined as substantive.
Administrative and management activities are defined as:
- Billing customers, clients and patients.
- Maintaining company books and records.
- Ordering supplies.
- Setting up appointments.
- Forwarding orders or writing reports.
To get the details on these and other factors regarding the qualified definitions of a home-based business, review the IRS Publication 587.
- Supplies—Anything you use for your tastings like pens, decanters, tablecloths, chocolates, printer cartridges, file folders, etc.
- Advertising—Business Cards, catalogs, even your Wine Club but again, records are key here. Take your latest wine club wines, invite friends over to try the latest installment, have them sign a guest book and document the wine and their reactions to verify you are using the wines to create business. Also, all samplers you purchase for your own tastings and any monies paid out to advertise your business are tax deductions.
- Cell Phone—Again records are key. When your cell phone bill arrives, note which calls are for business. Your tax preparer can help you determine how much of your bill you can legally deduct.
- Internet connection and second phone line costs are a deduction since you have a web page and web office. (If your children do their home work and surf the web on the same computer, you may not be able to deduct all costs. Get your own computer as soon as possible to avoid conflict.
- Postage
- Bank Charges
- Travel—Airfare, taxis, hotels are 100% deductible, meals only 50%
- Gifts—You can deduct up to $25 dollars a year per client as a gift so sign up family members and friends as wine club members, send a gift from your business for Xmas or B-day and take up to $25 as a deduction. Not only do you earn profit from buying a gift from your business but you also get a deduction.
- Entertainment—Buy coffee for a client or prospective client, go to lunch with your downline—these are 50% deductible. Make note of these dates in your day planner, pay with your debit card or credit card you use for business and get receipts
- Education, Dues and Subscriptions—Be sure these are paid through your business accounts
- Employing your Children—See #12 on “A Dozen Deductions” from Bizrate.com in the attachment. The government allows children 17 and under to earn up to $5000 a year without paying taxes. So put your children to work in your business, document their service and pay them instead of giving them an allowance or taking them shopping for new clothes. Here again you are transferring taxable income into the non-taxable category through legal deductions. You can also make payments into Roth IRA’s for them in the form of wages.
Disclaimer: Please consultant YOUR tax advisor, we are not accountant’s and are providing this information as a guide. We are not responsible for the accuracy of this information.