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Tax Tips for Home Based Businesses

For Educational Purposes Only

Why pay more taxes than you are legally required to pay?


First, you have to understand that there are Two Types of Taxpayers:

Employees have very few tax deductions available to them. Mortgage interest, standard deductions for dependents, gifts to church or charity, and contributions to a retirement plan, are usually the only deductions available. For the most part, employees are taxed immediately on what they earn: their "take home" pay is after taxes.

Business Owners (and you can be one, too!) earn money, spend what they want or need to run their business, including their salary, and pay taxes on whatever is left. The tax deductions available for Business Owners include: mortage interest, rent, utilities, computers, janitorial services, office supplies, furniture used in business, phones, publications, travel expenses, meals & entertainment, medical insurances, gifts to charities/clients, contributions to employee retirement plans, landscaping, or any other expense that qualifies as "ordinary and necessary" to operate their business.

Here's the key:

Home and Personal Expenses are NOT tax-deductible, but Business and Business Expenses ARE tax-deductible. Having a Home-Based Business Pays Off!

To qualify for tax-deductions, the Business Owner must actively "run" a business. The Business Owner must establish to the IRS's satisfaction "the intent to produce profit."

How does the Business Owner establish "intent to produce profit"?

  1. The Business Owner establishes him/herself as an "expert" by holding regular (documented) meetings and/or training sessions with others in the business, i.e. MLM calls or meetings with up and downline. Document participation in meetings/calls.

  2. The Business Owner establishes "running the business" through long distance call logs, receipts for postage, ordering of business promotional literature and products, business cards, products, etc.

  3. The Business Owner establishes "actively running" the business by holding meetings, making presentations, doing mailings, and having customers and prospects.

  4. The Business Owner's history of income or loss with respect to the business activity must be "relevant" to "the intent to produce profit." The IRS would assume that a business with 3 or 4 years (in a row) loss that is not decreasing would be abandoned by the Business Owner if the intent were to make a profit. If the business is NOT abandoned, then the IRS could assume that the business is for "tax-reduction" and not "profit producing" purposes. If a business does not show a reasonable profit at least some of the time, then change businesses, or get hassled by the IRS over the deductions.

  5. The Business Owner deducting "personal pleasure or recreation" expenses - golf, vacations, theater tickets, dining experiences, etc. must meet the "reasonable" and "relevant factors" in the eyes of the IRS!

  6. The Business Owner needs a Business Plan with vision and mission statements, target prospects and customer profiles, competitive environment and marketing advantages, as well as sales strategies. The Business Owner may wish to seek advice of an attorney to develop this document.

  7. The Business Owner needs to have a customer and/or prospect list, and "work it." Keep copies of mailers, faxes, emails, phone call notes, telemarketing scripts, advertising, etc.

  8. **This is Important!: The Business Owner needs to use professional taxpreparers who specialize in home business tax law.

We have established the "intent" of your business to make a profit. Now for the Home Business Tax Tips! How many of these deductions do you take?

  1. Mortgage payment/interest - according to the Business Use Percentage (BUP) of the home
  2. Rent - renters can now claim a business rent deduction on Schedule C according to the BUP.
  3. Utilities - gas, electric, water, sewer, trash collection - monthly cost as well as repairs, service and maintenance - use BUP
  4. Cleaning / Janitorial Service
  5. You can hire your children to perform this task - use BUP - more later #28
  6. Computers, Copiers, Fax Machines, Telephones, Palm Pilots
  7. TV, VCR, DVD player - used for business presentations - use BUP
  8. Office Supplies - paper, pens, ink cartridges for printers & copiers, envelopes, letterhead
  9. Mailing / shipping costs - postage, UPS, Fed Ex, Airborne, etc.
  10. Paid advertising, classifieds, radio spots, etc.
  11. Mailing list rental fees, Biz-Op lists
  12. Direct Mail costs - postage, envelopes, printing
  13. Promotional Materials - prospecting tapes, videos, flyers
  14. Vehicle Operating Expenses (Vehicle Use Log)- gas, parking, tolls, maintenance/repairs, purchase/lease monthly payments, interest, taxes, fees, insurance.
  15. Wages, commissions, benefits paid
  16. Legal/professional fees - legal, tax preparation, tax advice, bookkeeping, payroll service.
  17. Business licenses/fees, banking fees, interest on business loans, dues/subscriptions, etc.
  18. Desks, chairs, sofas, coffee tables, filing cabinets, bookcases, bulletin boards, and other furniture and furnishings - include coffee maker, water cooler in kitchen
  19. Painting, wallpaper, and other repairs/remodeling
  20. Phone bills, cellular phone bills, pagers (Your base home phone charges are NOT deductible; add-ons to facilitate business are.)
  21. Internet Service Provider.
  22. Newspapers, magazines, books, on-line media - (Reader's Digest, Playboy or Glamour are probably NOT business-related publications - unless you have a waiting room in your home. Again, be "reasonable".)
  23. Plane fares, hotels, meals, car rentals while traveling - pay attention to IRS rules
  24. Dinners, ball games, theater tickets, health clubs, association dues - this is the category that is most audited by the IRS.
  25. Health, life, dental, disability and other insurance - premiums, copays & deductibles.
  26. Security alarms, security cameras, floodlights, motion detectors, and guard dogs
  27. Business-related cars, trucks or boats.
  28. Gifts to charities, non-profits, libraries and colleges
  29. Contributions to employee retirement plans - including business owner.
  30. Grass cutting, landscaping, maintenance, repairs, painting, driveway repairs, etc. - BUP applies
  31. Parking and toll fees.
  32. Holiday/birthday cards, postage & gifts - to promote business or send to customers
  33. Storage unit, shed, garage, workshop - for storing products, materials, etc. - use BUP
  34. Pest control service
  35. Direct business expenses are usually 100% deductible
  36. Indirect Expenses are deducted using the Business Use Percentage (BUP) of home - for example, an office, a bathroom & a living room (450 square feet) used in the business in a 1,500 square foot (living space only) home would have a 30% BUP.
  37. From #5 - Hire your kids (six years of age and older) instead of paying them an allowance to do business-related tasks - clean office, take out trash, file, mailings, etc. (The tax free limit was $4700 per child - $90.38 per week - for 2002. Family members under 18 are exempt from payroll deductions. Family members need to complete time sheets or work log. Wages must be "reasonable & customary" for community.)
  38. The $90.38 per week paid to your child for work (in pre-tax dollars!) can be deposited into a joint account - you and your child - and can then be used to purchase personal, non-deductible items: clothes, movies, automobile, wedding dress, summer camp, etc.
  39. Business related mileage - 36.5 cents for 2002. By incorporating personal errands into your business "trips" i.e. dropping the kids off at school while going to the post office or copy center, you can save time and money - and have a legitimate business deduction.
  40. Business trips (w/ time for pleasure!) - travel must be "usual and customary" for your type of business; travel must be conducted with intent to obtain a direct business benefit; travel must be helpful and appropriate to developing and maintaining your business.
  41. For travel in the U.S., IRS allows a 100% transportation and lodging deduction if the primary purpose of the trip was business, and more than 1/2 of the days are devoted to business. You can not deduct the transportation costs for 2 business days in a 5 day trip, but you can deduct the meals and lodging for the 2 days.
  42. A holiday in the middle of the week or a weekend in the middle of a business trip can be considered business days. (Is it practical to go home and come back?)
  43. If the airlines give you considerable savings by staying over to Saturday, it can be counted as a business day.
  44. A travel day is a business day, if you travel for at least 4 hours of the day.
  45. Laundry and dry cleaning on a business trip are deductible. Tips, cabs, phone calls also.
  46. 50% of meals - "clear business setting" (Document: date, amount, purpose, relationship)
  47. 50% of entertainment - if it has a "clear business setting" or is "associated entertainment" - golf, theater, fishing, boating, ballgame, etc. (Document, document! - advisable to be conservative on this one- IRS audits this one!)
  48. IRS requires "proof of purchase" on all deductions, not just an invoice or receipt, i.e. cancelled checks, credit card statement.
  49. Keep business deduction files for each tax year: Advertising/Promotion, Vehicle Operating Expenses, Lease/Purchase of Business Assets, Wages/Commissions/ Employee Benefits Paid, Business Use of Home, Office Supplies, Business Travel & Entertainment, Misc. Business Expenses/Bank Statements.
  50. Keep a daily appointment calendar.
  51. Non-business related deposits to your business account need to be clearly marked as "loans", or the IRS may view them as income during an audit.
  52. Never appear in person to an IRS audit - always send your tax preparer, accountant or enrolled agent.
  53. Good News! If you find deductions that you failed to make, you can file amended returns back three years!

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