How a Home Based Business Can Save A Bundle On Taxes
Every year, tens of thousands of people develop an interest in
"going
into business." Many of these people have an idea, a product, or
a
service they hope to develop into an income producing business
which they can operate from their homes.
Tax deductions are one of the many benefits of engaging
in a home business. However, to be eligible
for business related deductions today, you must use that part of
your home claimed EXCLUSIVELY AND REGULARLY as either the
principal location of your business, or place reserved to meet
patients, customers, or clients.
Before getting involved in any business endeavor just for
the tax benefits, it is highly
recommended that you seek the counsel of a skilled tax attorney.
Attorney Drew Miles provides an
excellent free DVD
that is a very useful introduction to various tax saving methods
using different legal entities. There are literally thousands of
pages of IRS regulations that apply, and it is likely you will
not be familiar with them. One mistake can come back to haunt
you at a later date.
An interesting case in point: if you use your den as an office
and the principal place of business, working there from7:00 to 4:00 every day, but permit your children to watch TV in
that room during evening hours, IRS rules dictate that you cannot
claim a deduction for that room as your office or place of
business.
There are, however, a couple of exceptions to the "exclusive
use"
rule. One is the storage on inventory in your home, where your
home is the location of your trade or business, and your trade
or
business is the selling of products at retail or wholesale.
According to the IRS, such storage space must be used on a
REGULAR Basis, and be separately identifiable space.
Another exception applies to daycare services that are provided
for children, the elderly, or physically or mentally
handicapped.
This exception applies only if the owner of the facility
complies
with the state laws for licensing.
To be eligible for business deductions, your business must be an
activity undertaken with the intent of making profit. It's
presumed you meet this requirement if your business makes a
profit in any two years of a five-year period, regardless of the
size of the profit.
You can also deduct business expenses
such as supplies, subscriptions to professional journals, and an
allowance for the business use of your car or truck. You can
also
claim deductions for home related business expenses such as
utilities, and in some cases, even such items as a new paint job for your
home.
The IRS is going to treat the part of your home you use for
business as though it were a separate piece of property. This
means that you'll have to keep good records and take care not to
mix business and personal matters. No specific method of record
keeping is required, but your records must clearly justify and
deductions you claim.
An extra computation is required if your business is a home day
care center. This is one of the exempted activities in which the
exclusive use rule doesn't apply. Check with your professional tax preparer
and the IRS for an exact determination.
If you're a renter, you can deduct the part of your rent which
is
attributable to the business share of your house or apartment.
Homeowners can take a deduction based on the depreciation of the
business portion of their house.
If you are self-employed, the proper place to claim your business deductions
is on
SCHEDULE C, PROFIT(or LOSS) for BUSINESS OR PROFESSION. The IRS
emphasizes that claiming business-at-home deductions does not
automatically trigger an audit on your tax return. Even so, it
is
always wise to keep records meticulously within the proper guidelines,
and of course keep detailed records if you claim business
related
expenses when you are working out of your home. You should
discuss this aspect of your operation with your tax
professional.
The self-employment taxes pay for Social Security coverage, also
know as FICA. Incorporaing can reduce the amount of
self-employment tax that you have to pay. The strategy is to pay
yourself a lower amount of wages, and take some income as
dividends from the corporation. Dividends are not subject to
self-employment taxes.
If you have a salaried job covered by Social Security, the
self-employment tax applies only to that amount of your home
business income that, when added to your salary, reaches the
current ceiling if you are not incorporated.
Another good way to trim taxes is by setting up a Keogh plan or
an Individual Retirement Account. With either of these, you can
shelter some of your home business income from taxes by
investing
it for your retirement. As always, the best advice is to seek
counsel from a competent tax professional.
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