The Tax Man Cometh for Home Business Owners
Tax time can be a stressful time for the home-based business owner, but it doesn't have to be.
Tax breaks can make this time of year far less stressful and is one of the many benefits of working at home. The only thing that can make this time of year a nightmare is if you are flagged for an audit. And the chances you will be are greater because you operate a home business. There are ways you can avoid this dreaded scenario---the most important of which is to follow the Internal Revenue Services rules. They are there for a reason.
The number one rule of filing taxes.........Be honest.
Any personal, living, or family expenses cannot be deducted, but there are exceptions. For example, if you have an item that is used partly for family use and partly for business use, such as a computer, you are allowed to deduct a portion of that item. That pertains to such things as borrowing money, as well. If you borrow $50,000 and use half of that amount for your business (and you can document that expense) and half for a new swimming pool, the IRS will allow you to deduct the portion of interest on that loan used for business, i.e., 50 percent in this case.
Travel expenses tend to be a common area for people to fudge a bit on their taxes. You cannot claim a trip to the Bahamas for your tenth anniversary as a business expense simply because you handed out a few business cards or answered some business e-mails while there.
According to the IRS, the expense must be ordinary and necessary. No, that 60-inch flat screen TV that you keep in your office would not be considered ordinary or necessary. You need both to comply with the guidelines.
But you can deduct many items as long as they are business related. One of the most important things to remember is you must have a designated office space in your home. You cannot use the dining room as your office and claim a deduction for your home business. But you can make all kinds of other deductions. For example, if you make teddy bears, the cost of the materials, the cost of shipping, and any storage costs, are all deductible. Any capital expenses that are specifically tied to your business such as the purchase of a computer or laptop can be deducted.
You can also deduct the cost of starting up your business. That includes office furniture, any investment required to start up your business, computer and office equipment, etc.
Because you work from home, certain expenses that pertain to the upkeep of your home can be deducted, including mortgage interest, insurance, utilities, repairs, and depreciation. The IRS dedicates an entire section to what it does and does not allow for deductions on its website.
Unless you are a financial whiz or feel comfortable doing complicated tax forms, it might be a good idea to hire a professional accountant. The last thing you want to face when you are running a home business is an expensive audit without a professional to back you up.
About the Author:
Patrick Elsberry is the owner of HomeProfit.biz which is dedicated to helping fellow entrepreneurs find the best home business opportunities on the Internet. His site offers a newsletter, blog and other resources for launching a profitable home business. Free e-course at => www.HomeProfit.biz