It is said so often that it has become a bit of a cliché, but one of
the great virtues of starting a home business are the tax breaks you
can claim. Another popular belief surrounding home businesses,
however, is that claiming aggressive - and maybe slightly exaggerated
- write-offs is a sure-fire way to attract IRS auditors. In this
article, we'll look at some of the more popular home business
write-offs as well as some tips on how you can legitimately claim
them.
*TUTORIAL: Starting A Small Business*
1. Keep a Business Journal
Being audited is not the end of the world. However, being audited and
not having the records to back up your deductions can be a nightmare.
The simplest way to avoid this unpleasant situation is to keep a daily
log of your home business activities. Did you buy paper for the
printer in your office? Write it down and either attach the receipt to
the page in the case of a hardcopy or scan the receipt in if you are
keeping a digital log. The same goes for mileage, phone calls and
other costs, as well as payments received by your business.
The more detailed your accounts are, the easier it will be to face an
audit. Compiling your daily reports into a monthly tracking sheet will
drastically shorten the time it takes you to get your taxes together,
and it will have the added benefit of providing a snapshot of your
business month-to-month.
*2. Write-Off Your Workspace*
Writing off a home office can be particularly attractive if you have a
line of work that can be neatly confined to a dedicated room. You can
still write off part of a shared room, but in either case, the space
is calculated as a percentage of the total house or apartment area.
That percentage is applied to all the related costs, including
utilities, insurance, rent or mortgage payments and so on. Do not
claim unrelated expense like the installation of a bird fountain in
the backyard - those types of stretches make IRS auditors a little
testy. (
*3. Update Your Equipment*
Office furniture, software, computers and other equipment are all 100%
deductible within the year that the cost is incurred - you don't need
to depreciate. There is an upper limit and the purchases must be
majority-usage (primarily used) and necessary or helpful for business.
Within those generous guidelines, however, you should have no problem
keeping current. However, a widescreen TV and La-Z-Boy for the office
is going to be a hard sell.
*4. Save for Retirement,* *Stay Healthy*
If you are working solely for your home business, you will have to pay
the employer's share of Social Security and health insurance, but you
can deduct half the amount of social security and the total premiums
for you and any employees (more on that later). You can also fund
retirement plans designed for the self-employed - SEP-IRA, Keogh
plans, etc. - and write the contributions off against your personal
income tax.
*5. Talk Up a Storm*
If chatting with clients is a necessary (or helpful) part of your
business, it may be worth getting a second phone line or a dedicated
business cell phone, as both of these are 100% deductible. If you only
converse with clients occasionally, you can still write off the costs
by noting the dates, times and reasons for the calls and then circling
the items on your regular phone bill to deduct at tax time.
*6. Get Connected*
Similar to the phone bill, you can deduct part of the cost of your
internet if you use it for business. There is no absolute percentage
to use, but it will be difficult to write off more than 50% if other
members of your family are using it for non-business purposes. Be
reasonable and pick a defensible percentage that you won't regret in
the case of an audit.
*7. Entertain Us*
You can wine and dine clients - emphasis on clients (preferably paying
or likely to pay clients) - and get a tax break. The tendency for
business owners at all levels to abuse this write-off has scared many
home business owners away from claiming it. However, it is acceptable
for you to take out a client for a meal and some entertainment. It
will be easier to defend a $200 deduction for a client who has brought
you a lot of business than the same meal for a buddy who paid you $20
for an hour's work over the entire fiscal year.
*8. Take a Trip, Not a Vacation*
Have to hit the road to expand your market? Save your receipts. On
business trips, your travel expenses are 100% deductible and your food
expenses can be deducted at 50% of the total. Keep all of your
receipts because even things like dry cleaning and tips are considered
a necessary expense when you're out pounding the pavement in new
markets.
Your local day-to-day mileage incurred for business purposes can be
written off as well, so give the same attention to tracking your
mileage on smaller trips that you would to the expenses of an
overnight trip. For many people, the mileage deduction is the more
realistic deduction than first class tickets to New York. Remember,
you have to be able to justify any trip and preferably show the payoff
to your business resulting from it.
*9. Employ (Not Just Pay) Your Family*
You can use family members as employees and deduct their salaries as
long as you account for their work and pay the going rate. If you have
a business that lends itself to having a spouse and kids help out,
then use that labor pool. You'll likely pay less than market rates for
the help, and you can deduct insurance premiums for them as well. As
an added bonus, children under the age of 17 don't incur the Social
Security tax, but they can still make contributions to a Roth IRA - so
you can teach them work ethic and saving habits in one go.
*10. Make Justifiable Deductions*
The most important tip has been a theme throughout, but it is worth
repeating: just because you have a home business doesn't mean you can
go crazy with deductions. If you don't think you can face down an
auditor with detailed proofs justifying the deduction, then perhaps it
isn't a deduction you should be taking.
*The Bottom Line*
A home business can be a rewarding experience, both for the extra
income it can bring in and the tax breaks it yields. A complete read
through the IRS small business publications is well worth your time.
You will learn more about the deductions mentioned here and what
conditions need to be met to claim them. Although it is important to
keep accurate records and stick to deductions you can justify, it is
also in your interest to maximize your deductions as much as you can
while staying within the rules. The IRS guides are not nearly as
difficult as they are made out to be, but if you still feel adrift
after reading them, then finding a good business accountant will save
you time and hopefully a lot of money.
*by Andrew Beattie*
Andrew Beattie is a managing editor and contributor at
Investopedia.com.
Source: Investopedia.Com
