Common Tax Breaks For Home Businesses
When you first start your home-based business, you are so caught up in getting that first client, that first check, and that first order that you donâ€™t really think much about taxes. In fact, most business owners fail to keep the receipts for business expenses properly filed away for future reference. Typically, everything is about making profit initially until tax time hits. Then, you realize that you did not prepare yourself for things like self-employment tax and other income tax.
On the other side of the coin, there are those who go overboard when they look for each tax break and tax benefit they can possibly find. In fact, they go so overboard that they exaggerate many claims and their business ends up getting audited. It is important that before you offer your products or services for sale that you know what you will be expecting down the road in terms of taxation. You need to know the details of each major tax benefit that a home business can deduct at tax time.
Everyone knows about the deduction on taxes for home office expenses and immediately they become excited over it. Yet they fail to read the details of what it involves and they fail to heed the warning that a home office deduction is probably one of the biggest warnings or red flags to the Internal Revenue Service or IRS. In fact, sole proprietors who file Schedule C and claim the home office expense can trigger audits.
Why is this? It is simply because a sole proprietor who files Schedule C with Form 1040 for the yearly tax return has many opportunities to convert personal expenses into business expenses and deduct from the gross earnings, and taxpayers often abuse home office expense.
In order to legitimately claim a home office expense, the office should be a separate room in your home and used for nothing else but work. It should not be shared for entertainment activities. It should not be a living area where other family members come in to watch television. It should not be a place used for personal activities. It must be a place that you use daily to manage your business. It would be a place where you do work, do billing, write correspondence, and any other business-related activity. Many times, home business owners such as landscapers will work away from the home office but come back to do their books in that designated area within their home.
Other tax benefits a home business can take are those related to the infrastructure of your home. In other words, you can deduct a portion of utilities, mortgage interest, property taxes, and other expenses related to the structure of your home. The way it works is by measuring the square footage of the designated home office and then calculating that as a percentage of the overall home square footage. You are allowed to deduct that percentage of the expenses.
You can deduct all business expenses on a Schedule C which include expenses for advertising, office supplies, fees related to business operations, and cell phones that are used exclusively for business. Just make sure that you keep receipts for everything and always check the appropriate IRS publications and consult an accountant if you are unsure if a business expense will give you a tax break.
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