Tax Advantages of a HOME-BASED BUSINESS

TAX ADVANTAGES

Note: While we are not "tax professionals", we do know some of the benefits of having a home-based business that we enjoy and would like to share them with you below. Did you know there are Tax Deductions that you are entitled to by owning your own Home-Base Business?  Travel Deductions: Did you know that you can deduct 100% of travel expenses incurred in the promotion of your home-based business? To make your personal or family vacations partially tax deductible: Combine business and pleasure provided you meet some simple IRS rules as to the number of business days and travel days exceeding your personal days on the same trip. If you are a wage earner or salaried W-2 employee, your home-based business may allow you to immediately increase your W-4 withholding exemptions thus decreasing the amount of taxes withheld from your paycheck resulting in a higher take-home net pay. If you already have a Home-Based Business, then check to see that you are taking all deductions you qualify for. Vehicle Expenses: Business use of automobiles are deductible, either using the IRS standard per mile rate (which is changed annually) plus parking and toll costs, or all actual expenses including depreciation (which is limited by the IRS depending on the year purchased or put the year the auto is put into business service). Mileage records must be kept in either scenario to determine the business use. Any mileage used in the promotion of your home-based business is deductible. The amount changes annually and can add up quicker than you think. Even if you stop to buy a pen or stamp on your way somewhere else, that short trip becomes a business trip. It pays to keep track of all your mileage! Depreciation: The expense deduction (write-off) of the cost of an asset over time (useful life), usually 3-5-7 and up to 40 years depending on the asset (IRS tables set these limits). Some vehicle depreciation is not limited (as is automobile depreciation) because the vehicle is over 6,000 pounds. For these vehicles, regular and additional first-year bonus depreciation can be used resulting in greater depreciation in the early years, but by doing so, the depreciation is lower in the future years. Section 179 Expense: The election to immediately deduct the cost of newly purchased personal property used more than 50% in your business, however there are income limits and total asset purchase limits to consider. Section 179 expense is the only way to potentially write off 100% of an asset in the year of purchase, however if the asset is not held for the full useful life period required by the IRS, or the asset use falls below 50%, then a recapture of the section 179 expense will need to be made in the future. Extra Vehicle Deductions: It's a good idea to keep track of your actual vehicle expenses. Sometimes itemizing actual expenses outweigh your standard mileage deduction. Your Tax Professional can assist you in evaluating which method is better for you. Don't forget... the cost to rent a vehicle for business use is fully deductible even if you use the standard mileage rate for the vehicle you own. Travel Deductions: You can deduct 100% of travel expenses incurred in the promotion of your home-based business. Make your personal or family vacations partially tax deductible: Combine business and pleasure provided you meet some simple IRS rules as to the number of business days and travel days exceeding your personal days on the same trip. DEDUCT 50% of Meals and Entertainment: Keep simple records of the business purpose of such expenses. DEDUCT for Business Use of Your Home: Convert a percentage of your mortgage or rent and associated insurance, maintenance, property taxes, and utilities to tax deductions. DEDUCT for Depreciation of Your Home: Only the business use percentage is tax deductible. DEDUCT Advertising Expenses in Promoting Your Home-Based Business. This includes your postcards, flyers, or booklets that you send out each month. DEDUCT for Business Communications: All phone bills, cell phones, voice mail, pagers, etc. used in your home-based business. DEDUCT Educational Expenses: All seminars and educational courses benefiting your home-based business are tax deductible. DEDUCT for Supplies Used in Your Home-Based Business, i.e. stamps, paper, envelopes, pens, pencils, printer ink, etc. DEDUCT Online Services Used in Promoting Your Home-Based Business on the Internet. DEDUCT the Costs of Record Keeping: software, computer equipment, etc. DEDUCT a Percentage of Your Medical Insurance. * Payments Not Covered by Your Medical Insurance Can Be Tax Deductible: Implement a Medical Reimbursement Plan that covers your family employees. Items such as cosmetic surgery, braces, co-pays etc. may also be covered under a Medical Reimbursement Plan. DEDUCT Legal and Professional Fees: All CPA and tax preparation fees in properly filing and documenting these tax deductions are deductible. DEDUCT dry cleaning when you get home from a business trip: dry cleaning and laundry are not only deductible when on a business trip, but if the clothes got soiled while on the trip, the first dry cleaning bill when you get home is totally deductible. HIRE YOUR CHILDREN: Children ages 6-17 can be employed in your home-based business for tax deductible wages on which no payroll taxes are paid. Private School: School expenses you are paying with after tax dollars can be converted by employing your children in your home-based business and then having them pay the tuition. Set Up an IRA: with Matching Contributions for Your Employee Children: You can accumulate a college fund for each of your children that is tax deductible for you and provides them with the funds they need. There is no 10% penalty in withdrawing these funds for college tuition and expenses.  Adopt an Educational Assistance Plan: Only applies to students over 21 who are your employees and could be your children or spouse. Qualify Your Hobby: as a Home-Based Business deduction. Review Your Tax Returns for the Last Three Years: Let a CPA professional review your previous 3 tax returns for mistakes and missed deductions. The fees for filing these amended returns which result in a refund to you are tax deductible. Learn to Audit-Proof Your Records: Any educational system that teaches correct record keeping to make you audit- proof is also tax deductible. LIFE IS MORE FUN WHEN IT’S "TAX DEDUCTIBLE"   The ultimate tax shelter: owning your own business!  The No. 1 way to reduce your taxes is to convert personal expenditures into allowable deductions. Turn even a hobby into a business and you'll cut your tax bill. It's almost that simple. This is part of what we call the ultimate tax strategy—that of converting personal expenses into legitimate business expenses. To win this game, you must own your own business. This is not complicated, expensive, or difficult to do and incorporation is not necessary. Let's see how. Establishing a "profit motive" is the key To be in business, you merely declare it. And by doing so, you can turn personal expenses into tax deductions. If you want to operate in a non-corporate format, as an individual proprietorship, but under a different name than your own, no problem. It's easy. In some states, you may have to file a "DBA" (doing business as) form with your local county clerk. Basically, you just fill out a form with your name, address and the assumed name under which you're doing business. For example, I might be "John  B. Distributor DBA The Home-Based Business Associates." Here's the best part: Your business doesn't have to make a profit for your expenses to be deductible. All you have to do is establish a "profit motive". Under the Internal Revenue Code, a "profit motive" is presumed if you earn any net income in any three out of five business years.   It's recognized and expected that new businesses probably won't make a profit in the early years. In fact, in the early years, you can insist that the IRS defer any challenge for the first five years as to the legitimacy of your business by filing Form 5213. Remember you don't have to show a profit — just a "profit motive." In one case, despite 20 years of losses, the court found a profit objective and allowed the deduction of business losses in full for one company. The case was not unusual. The test for deductibility is whether you have an actual and honest profit objective. You need not have a reasonable expectation of a profit. While the Tax Court requires a primary or dominant profit motive, the U.S. Claims Court has held that having a reasonable chance to make a profit, apart from tax considerations, will suffice. The test is subjective: Was your intent to earn a profit? The IRS looks at the following factors to decide if your intentions are honorable: The manner in which you carry on the activity; Your expertise and the expertise of your advisers; The time and effort you expend in carrying out this activity; The expectation that the assets used in your business may appreciate in value; Your success in carrying on similar or dissimilar activities; Your history of income and losses with respect to the activity; The amount of occasional profits, if any, that are earned; Your financial status; The elements of personal pleasure and recreation. That doesn't mean that just because you enjoy doing your "job" that the expenses aren't tax-deductible. The Tax Court has ruled that "suffering has never been made a prerequisite for deductibility." Moreover, even if you're employed full time elsewhere, that doesn't prevent you from having another vocation on the side. Many people work a full-time job while running a second business on the side. This technique works whether your business is your primary source of income or it's a sideline. Your hobby can be a business. That means your hobby could qualify as a business. In the process, you'll cut your tax bill. For example, there was a man who raced stock cars as a hobby. When he went to see his accountant, they converted his "hobby" into a business. He had cards and stationery printed. He ran ads looking for a sponsor. He gave what once was his hobby the image and appearance of a business and he demonstrated a real profit motive. He wanted to make money. This person had a salary from his primary job of $40,000 a year. When his new business expenses were deducted, not only did he pay zero taxes but he qualified for the earned income credit, so the IRS actually paid him. Two years later, he was audited for that year's return. The law requires that you prove your business expenses, with receipts, checks or a journal that's regularly updated. Unfortunately, he had none of these for the first year. His expenses, however, were legitimate, and he had the receipts for the subsequent two years. On the basis of the receipts for the two subsequent years not in question, this taxpayer with $40,000 in other income and no receipts, after an IRS audit, paid less than $100 in taxes, including penalties and interest. Had he kept the records for the first year, he would have paid nothing.   How to qualify as a business deduction. To qualify as business deductions, your expenses must be: Ordinary and necessary — defined by the courts and the IRS as "reasonable and customary," Paid or incurred during the taxable year, and Connected with the conduct of a trade or business. The term "reasonable and customary" depends on your specific business and the business customs in your locale. The expenses don't have to necessarily be reasonable and customary to you, but simply to your particular trade or industry. There are innumerable cases of "hobbies" converted into "businesses" with expenses allowed. In one case, a husband and wife produced, exhibited and sold their sculptured works. Their expenses were considered ordinary and necessary business expenses. In another case, a coal miner operated a kennel for bird dogs. For 11 consecutive years, he lost money.   But the courts allowed the deductions and the losses because there was a profit objective. In a more recent case, a high school teacher's golfing activity was declared an activity with a profit motive, so he could legally deduct what once was his "hobby." Focus on your profit-making motive.

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