Tax Advantages: Another reason for a Home Business

A Home Business can give you many Tax Advantages

Tax benefits are one of the many reasons to create a home office. You can realize savings on your taxes that can make having a home office worthwhile even if you are not earning a lot of money.

The first step in realizing the earning possibilities of your Home Office is obvious; you must work and function as a office. Fail to do so and you can never attain the potential profits available.

Establish your Business

Establishing a Home Office is simple, you need to do only three things for the IRS to recognize you as a legitimate business:

  1. Name your business. Simple is better than complex for a variety of reasons, but your business name is entirely your choice.
  2. Open a separate checking account and use it exclusively for business transactions. One way to keep this separate from your personal accounts is to use a different bank, thereby avoiding inadvertent mixing of business with personal money.
  3. Maintain reliable records. Business records are for you; but good records are invaluable to you on many levels, including dealing with the IRS.

Proper documentation is vital when it comes to writing off your expenses for tax purposes.  Without this documentation it is difficult to prove that the expenses was a legitimate business expense.  Keeping good records will protect you in case there is ever a question.

Tax Benefits

Record Keeping

You should keep records for both your income and expenses:

 

  • Income Records: Any money received from your business should be deposited into your account and kept track of.  You can do it all by hand but modern computer software such as Quicken makes it all much easier.  Be sure to keep everything up to date and balanced.
  • Expense Records: You should keep your receipts for any business related purchases.  You will also have a record of the expense on your bank account statement.  If your business has a lot of meals and meetings or travel that you are writing off, a journal or log book is a great way to keep track of these expenses and show they are legitimate.

Legitimate Business Expenses

The IRS recognizes business expenses as anything that is “necessary and ordinary” for the running of your business.

  • Necessary expenses: Anything that is essential for running your business.  An online internet business definitely needs a computer with internet service – these are both deductible.  A luxury car probably wouldn’t be for this business unless you could show some pretty good proof that you need it!
  • Ordinary expenses: These are things you need as you conduct business everyday. Things like office supplies and postage and handling are good examples.  Whatever you use to conduct ordinary business counts.

Extra Deductions for a Home Business

Because you work from home and have an office in your home you can take off deductions you wouldn’t get if you had a store.

  • Home Office Deduction – First, you need to create an office space withn your home.  It doesn’t have to be a separate room, it could be a corner of the bedroom or a desk in the hall.  As long as you have a designated place where you have all your necessary items to conduct business. Now this “space” and its expenses can be written off as a deduction.  For example, if you home is 2500 square feet in size and your office space is 250 square feet, then you can deduct 10% of many or your home expenses.  These expenses include things like your mortgage and your utilities – gas, water, electricity.
  • Car Expense Deduction – Everytime you use your car to do something related to you business – go get supplies, go to a meeting, travel to a seminar – you can deduct the expenses of that trip.  The IRS has a standard mileage deduction or you can keep track of actual expenses.  A mileage logbook is a good thing to start keeping with you when you travel.
  • Miscellaneous Deductions – there are other Home Business expenses that are beyond the scope of this article. As you conduct Business, they will be recognized if applicable.  A good accountant can help or even computer software like TurboTax will help you find these deductions.

Reporting to the IRS is done on Schedule C, Profit and Loss from Business; Schedule SE, Self Employment Tax, and Form 8349, Home Office Deductions. Obtain copies of these and review their content; you will gain insights into what is expected when it is time to fill them out.

At first glance they may be intimidating, but they are not too difficult. If you have trouble, an accountant or tax software can make you life much easier.

Other Schedules and Forms may be necessary according to the needs of your particular business. IRS Publication 334, “Tax guide for Small Businesses” is available from the IRS.

The internet and computer software has made it possible for almost anyone to successfully run there own business and do there own taxes.  A small home business can be set up and taken care of without the need for expensive outside help.

The tools available for your home computer can help you keep track of income and expenses and prepare that tax forms at the end of the year.  They are not very expensive and they are costs that are deductible!

Accuracy and simplicity are the key words to all of the above; none of it is difficult. Use the benefits of the system to your advantage and realize the maximum profit potentials from your Home Business.  As someone once said, “Its y’all’s money, y’all oughta be able to keep it”

Last but not Least

To be recognized as a business you must actively work your business.  Spend at least 5 hours a week on it and have a real intent of making a profit.  Getting a business name and a separate bank account go along way when proving that you are a legitimate business.

Do these simple things and you qualify for all the tax breaks.

[Click Here] to view more information from the IRS and access the many forms mentioned above.

[Click Here] to view self employed FAQ’s from the IRS.

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About Michael Tomberlin

I am happily married and have 6 wonderful kids so life is sweet! I am building my own business on the internet and helping others to do the same. If you are looking to achieve more in life and reach for your dreams of being your own boss let me know. I would love to help you.

Working online and sharing what I have learned about an online business and improving your health and wellness are two things I enjoy.

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