Ready to Open a Business? Tax Deductions Galore!

If you are working on making your financial situation a little better you may be turning towards a home business.  You might be looking to replace lost income, eliminate debt, or increase your retirement contributions.  Regardless of your reason for looking for additional income, home based businesses are a flexible and economical choice.

What are the financial benefits of owning a home based business?  You are aware that running a business from your home offers low set up and start-up costs, flexible hours, and the ability to be your own boss.  Much better than hearing Bill Lumbergh from Office Space saying, “Yeeeaaahhh, I’m gonna need you to come in on Saturday.”  Or another one that is always nice to hear from a co-worker who is a little too happy, “Somebody has a case of the Monday’s.”  If you haven’t seen Office Space then it is time to rent it, but I digress.

Sign me up for the home based business so I don’t have to listen to a boss who thinks I don’t have a life outside of work or co-workers that don’t understand that I like to remain quiet during the morning or I have to take a 3:00 nap.  As a business owner, working at home, you can do what you want when you want.

So, despite being able to make afternoon baseball games, working at home while the serviceman visits or enjoying your tax paid for cocktail, what are the tax benefits to running your own business at home?  Please note that daycares have additional rules and you should talk to your local Liberty Income Tax return service if you are running a daycare out of your home.

The IRS is not particular on your recordkeeping, but just like on your personal taxes, you will need to keep or have access to records that allow you to prove your deductions.

Here is a detailed list of potential deductions:

  • Your home office may qualify if you use it exclusively and regularly for administrative or management activities of your trade or business and if you have no other fixed location where you conduct those activities.
  • You will most likely incur additional expenses from running your business and they are considered direct, indirect and unrelated. Direct expenses are typically fully deductible such as painting or repairs in the area used for business while indirect expenses such utilities will only be partially deductible.  They will be deductible based on the percentage of your home used for business. Unrelated expenses such as the new deck you just added or other landscaping are not deductible (and you thought you could write that new pool off as an “entertainment” expense…shame on you).
  • Real Estate Taxes, insurance premiums and mortgage interest could be deductible and would be calculated as a percentage of your home.
  • Transportation is another deduction that you may qualify for if you travel to meet with clients or other business related expenses.  You will need to keep good records to claim mileage.  It is a good idea to keep a record of your odometer prior to starting the trip and the ending mileage.
  • Phone lines maybe deductible.  The IRS typically considers the first phone line in your home your personal phone, but additional lines would be considered a business expense.
  • Meals and Entertainment—most people are familiar with this category as they have a good giggle with the local sales man that laughs as he picks up the bill and says, “Aww, it’s ok, it’s a business lunch, right?”  The reality is that even though you may qualify for a deductible, it doesn’t make a sense to be the man without a plan when it comes to picking up the tab for meals unless they truly are entertaining a prospective client or service provider.  This area is often abused so make sure you keep your receipts for all meals and entertainment.
  • And of course, your tax preparation expenses can be deducted. 

Owning a business is a lot of work and can be a very rewarding career.  You often have the ability to reach income limits that are greater than working in corporate America and you have a flexible schedule which is becoming quite valuable in our time crunched culture.  However, having a great relationship with your local Liberty Income Tax preparation office and organized financial documents will be a relief come tax time.  Don’t wait until April to get organized, come see us today!

-david rocci

 

Disclaimer: Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.

 

Posted To: Tax Rants by David Rocci By: David Rocci On: Sunday, October 31, 2010
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