One of the benefits of a home business, which is not talked about enough, is the potential tax deductions that come along with owning your own business. Personally, my first two years being in Life Force, I brought home an extra $5,000 each year because of the deductions I was allowed. I was working still as an accountant and was receiving a W-2 at the end of the tax year from my employer and a 1099 from Life Force International. Although, from a cash flow standpoint, I was making much more in income than expenses with my Life Force business, the deductions were allowed to be taken against my W-2 income from my accounting occupation. Basically, it took me from a tax payment deficit, to bringing in an extra several thousand dollars and continues to save me money, year in and year out.
Below are potential tax deductions that, we as business owners, can enjoy;
- Products, except those that are personally used, are considered an expense of the business. I write off 50% of my products purchased as samples, therefore, tax deductible. Lifeforce shows a line item on your summary that is attached to your checks showing YTD product purchases.
- Make sure to record any miles driven pertaining to business activity (even if you make a business phone call at the beginning of your drive and one at the end, you can tally the mileage) and (only need to record for a “typical 90-consecutive day period” each year in order to determine what percentage of your driving is primarily for business and what percentage is primarily personal). Temp. Treas. Reg. 1.274-5T(c)(3)(ii)(c), Ex. (1). This calculation is used when taking the depreciation method opposed to mileage deduction. The equations is; Mileage x (44.5 cents per mile).
- You also have option to depreciate car over time. You could use this option if you had expensive car.
- You can add up all “operating costs” (including gas, oil changes, wheel balancing, repairs, interest paid on the loan, personal property taxes, etc.) of the car multiplied by the percentage determined in #1 above.
- TALK TO YOUR ACCOUNTANT AS THIS CAN BE COMPLICATED.
- NOTE-If you are leasing, you can multiply the percentage x lease payments.
Mortgage Interest or Rent
- Business rent deduction-Schedule C-IRS Publication 587.
- Since mortgage interest can be taken on Schedule A as an itemized deduction, you may consider moving it to Schedule C and taking the Standard Deduction.
- Your home office must pass 1 of 3 of the following;
Where the primary value of your business is delivered, or
Where you regularly meet with customers or prospects, or
Where the primary management or administrative function of your business is conducted.
- Calculation: square footage of office/total finished square footage of home or apartment=BUP (Business Use Percentage). You can also include square footage of rooms that are not exclusively used for business. Examples are; area that a book case including business materials, area that a conference table is where you have business meetings, area of walking around these items, etc. BUP x Rent/Mortgage Interest.
Other Home Deductions
- Gas, electric, water, and sewer (BUP x expenses).
This not only includes the utilities themselves, but any repair, service or maintenance (i.e. installing a new heat pump or furnace, adding a humidifier, repairing plumbing, inspecting your furnace, cleaning air ducts, maid service ((hire your kids for deductible “allowance”,**you can pay your dependent child up to $5,150 per child for 2006 for business activities, talk to your accountant for more specifics)), etc.). IRS Publication 587.
- Cleaning crews to dust, vacuum and empty the trash (BUP x expenses).
- Computers, copiers, fax machines, and telephones.
Base phone charges (what you would pay without a second line, long distance, or add ons) are NOT deductible. For second line, long distance, and add ons where primarily added/used for the business, 100% can be written off.
- Advertising (100% deductible).
- Paper, pens, and postage (100% deductible).
- Bank fees on business accounts (personal checking if no business account) (100% deductible).
- Desks, sofas, coffee tables, and other furniture.
100% deductible is used exclusively for business.
“Section 179 Election” allows you depreciate immediately the entire amount of the business assets as long as business use is at least 51%.
For partially used business assets, you can deduct a percentage of the asset. For example, let’s say your couch is used 3 out of every 10 times for business, you can deduct 30%.
- Credit card annual fees and business cards (100% deductible).
- Painting, wallpaper, carpeting, and other repairs/remodeling (BUP x expenses).
- Legal and professional services (100% deductible pertaining to business).
- Bad debts from sales or services (100% deductible).
- Phone bills(outside of “base amount” 100% deductible), cell phones (100% deductible if business), pagers (100% deductible if business), and Personal Digital Assistants (PDAs) (100% deductible if business).
- Magazines and books for business education (100% deductible).
- Newspapers, magazines, books, and on-line media (100% deductible).
- Services performed by independent contractors (BUP x expenses) or (100% deductible, i.e. accountant).
- Supplies and materials (100% deductible).
- Plane fares, hotel costs, meals and rental cars.
The tax law says that anytime your work “requires you to sleep or rest away from your principle place of business”, you may deduct reasonable travel and related expenses (such as meals, hotel, rental car, tips, etc.). IRC Section 162 (a)(2) and Revenue Rulings 54-497, 75-432, 63-145, 75-169, 76-453.
IRS’s 3 part test;
The travel must be usual and customary within your type of business, and
The travel must be conducted with the intent to obtain a direct business benefit, and
The travel must be appropriate and helpful to developing and maintaining your business.
You can deduct 100% of your transportation costs, 100% lodging, 100% of incidental expenses, and 50% of your meals if ½ of your days qualify as Business Days, and fewer than ½ your days are for non-business purposes (“51/49% Transportation Rule”) and the primary purpose of your trip is Business.
You CAN deduct your spouse’s expense if he/she is for a bona fide business purpose, he/she is an employee or owner of the business, and the travel and related expenses would be deductible for him/her even if he/she were making the trip alone.
TALK TO YOUR ACCOUNTANT to see what determines a “Business Day”.
- Taxes and licenses.
- Special work clothing or uniforms.
- Lunches, dinners, ball games, and theater tickets.
For the most part, only 50% of meals and entertainment expenses are deductible. IRC 274(n).
“The Four Requirement Test”;
At the time you decided to spend the money, you expected that there would be a future business benefit.
During the entertainment, you actually talked about things that could produce that business benefit.
Your principal reason for entertaining this person was to actively conduct business.
You incurred the expense so that you could talk directly with the person who could produce a future business benefit.
TALK TO YOUR ACCOUNTANT for the exact rules on meals. Per Diems can change depending on what you are doing, who you are worth, and what time of day it is.
- Security Alarms and hidden cameras (BUP x expenses).
- Health, life, dental, vision, disability, and unemployment insurance.
When your spouse is an employee of your home business, he/she could be eligible for “Employee Benefits” from his/her employer (you), and the cost of employee benefits are deductible to you as business expenses IRC Section 162 (a).
This can include all insurance plan annual deductibles, co pays for doctor visits and prescription drugs, plus non-covered expenses like orthodontics, eyeglasses, contact lenses, dental work, chiropractic, nutritional supplements, etc., Reg Sec 71-588; Plr. 9409006.
TALK TO YOUR ACCOUTANT ABOUT THIS DEDUCTION, CAN BE COMPLICATED.
- Company cars (and even boats).
- Contributions to Employee Retirement Plans.
- Holiday cards, gifts, and postage (100% deductible).
- Internet access fees, web hosting fees, Cable, DSL, or Broadband, computer extended warranty costs, database backup services, merchant discount fees, ink and toner cartridges, software used for business, spyware and antivirus subscription services, firewalls, routers, peripherals, surge protection equipment, conference call services (100% deductible).
- Any expense that qualifies as “ordinary and necessary” to operate their business.
- Make sure to keep all receipts.
- Accounting software can save a lot of time and can help to organize your financials. Since you are not a publicly traded company, there is no need for an audit, therefore any need for financials. Financial statements do come in handy if you are analyzing the strength, efficiency, and effectiveness of your business. If you would like to find out more about having your own accounting software, contact me and I can give you the software I use.
- The IRS can also ask you to prove the expense actually was paid for; therefore, make sure you have all bank and credit card statements.
- Capital expenditures are anything that can be depreciated over time. For example, a computer for your business is considered a capital expenditure. You can opt to depreciate the computer over a certain amount of years or take the full expense in the year of purchase. Other examples of capital expenditures can be office furniture, fax machines, copiers, cars, etc. If the purchase is intended to be used in your business, it probably can be deducted.
- **Remember to keep your receipts and have your accountant determine whether it is best to depreciate or take the full expense and if it qualifies as a deductible item.
- “Section 179 Election” allows you depreciate immediately the entire amount of the business assets as long as business use is at least 51%.
MYTHS ABOUT TAXES
- “My tax guy told me that I have to show a profit in two out of every five years, or else I’ll lose all my tax deductions.
FALSE-That is the “Hobby Loss Rule”. We have legitimate home based businesses. You could potentially claim losses year after year as long as you can prove that you have the intent to produce a profit and are actively working towards that goal.
- “I can only write off a room and the equipment and furniture in it if I use it exclusively for my business”.
That is the “Exclusive Use Rule” which applies primarily to home offices. You are able to write off some of the costs of furniture and equipment used partially for business whether they are in the exclusive use room(s) or not.
- “I’ve been told that the amount of my write offs can’t be any greater than the amount of money I make in my home business”.
That is a half truth. First, this is only true for “indirect expense” deductions such as utilities, rent, home insurance, etc. HOWEVER, indirect expense deductions can be “rolled forward” for use in any future years when you are making much more money. Secondly, when you operate your business in a business like manner with the intent to make a profit, your deductions in all other categories can be used to offset ALL personal income.
- INDIRECT EXPENSES are only deductible to the amount of net income, but can be carried forward in future years for deduction.
- DIRECT EXPENSES are allowed to exceed the amount of net income generated by your home business, and usually can be applied against ALL other income sources.
- For more information, go to www.homebusinesstaxsavings.com.
- Hire and TAX accountant to produce your return. You can deduct the amount of the charge from the accountant, you will have a person knowledgeable of all rules or can look them up, with the accountant’s signature your probability of an audit decreases, you will get the most out of your tax savings.
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**Note-This document is intended only to guide you. I am not suggesting any specific tax treatments.**