Home Business Taxes
Home business is on the increase every day. The Internet has facilitated many persons to operate and run their business from the calm and soothing atmosphere of the home. The need for commuting has been completely eliminated. However, it is a totally different story when it comes to satisfying the taxman.
You should be able to manage your money properly when you run a home business. You should understand and control your cash flow, manage your business finance, your banking operations and your business insurance in the right manner. You should work with a knowledgeable accountant and prepare your home business tax returns in time and in the proper fashion. Your bookkeeping should comply with the governmental regulations. Let us take a brief look at the various advantages and pitfalls in home business taxes.
The chief advantage in a home based business is that you would be able to convert several expenses into tax deductions. These expenses would normally not be deductible, if the business is a regular one. In this process, your Schedule C deductions would have much higher impact on the amount of tax you pay than those in your Schedule A. The deductions in Schedule C bring down the federal income tax, self-employment tax, Medicare tax, and other local and state taxes also. You need no longer wince and flinch when you hear the term Internal Revenue Service or IRS. However, you have to meet certain tests and criteria set by the federal and local authorities for substantial tax deduction claims.
Some of the significant tax deductions available to home business are listed here.
Traveling has to be business-related to be eligible for tax deduction. Personal travels would not count. Hence, you should have strong proof that the travel expenses are for business purposes only. The expenses are deductible for your spouse accompanying you, if you can prove that your spouse is also working with you.
The utility expenses of your home are deductible if the entire house is used for the business. Otherwise, only that portion of the utility expenses that could be attributed to your business is eligible for tax deduction.
For a normal business, only the interest amounts and property taxes are deductible under Schedule A. However, for a home business, part of the utilities, cleaning, pest control, building maintenance, lawn services, etc. could also be claimed as deductions under Schedule C.
Food and entertainment expenses allow for 50% deduction, if they are related to clients and vendors, both existing and prospective. Since your business is a home based one, you could boldly claim that every visitor to your house is a client and convince the taxman most of the time. Taking a potential client to lunch or dinner is eligible for deduction but dining out with your spouse is not.
You could also pay your children for making them work in your business, provided they are more than 8 years of age. Each child could be paid up to certain statutory limits, without paying tax on those amounts. Since your children working with you are your dependents, you need not pay Medicare or Social Security taxes also for them.
Your property taxes on home mortgage interest amounts could be claimed for a portion of tax deduction. However, this could be done only once, either in Schedule A or in Schedule C, not in both. If you are not the owner of the house, your rent payments could be used for tax deduction benefits.If you are the homeowner, the depreciation on your house is eligible for tax deduction at prescribed rates.
Precautions in claiming home business tax deductions
If you are using a computer in your home business, remember that you should not use that computer to send your personal e-mails. This would disqualify you completely.
If you are storing products in your house, then the utility and maintenance expenses of these storage areas are eligible for deduction, even if you mix your personal use in these areas.
If your total gross income is less than your business expenses, then the deductions you could claim would be limited. However, you are allowed to carry forward some of the deductions denied now, and even all the deductions in certain cases, to next year's tax return.
Maintain proper records of your accounts and include photos of your work area to prove the correctness of the deductions on utilities, maintenance, etc. Keep a log of the time you are spending for business at your home and have a separate phone line and computer for your business. This would avoid unnecessary questions from the IRS auditors.
For complete information on home business taxes, purchase IRS publications 587, 551, 946, etc.
Always consult a competent accountant before submitting your home business tax returns.
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