As tax time approaches, many home-based business owners begin completing their forms or paying their accountants with trepidation. This nervousness comes from two sources: a fear of being audited and a fear of having to pay a lot. For the most part, both of these fears are unfounded.
For one, audits are rare. In fact, only 0.5% of taxpayers are subjected to audits every year. And if you do beat the odds, keeping good records and maintaining receipts will help you weather the IRS storm.
Obviously you have not control over whether or not your return is chosen for an audit, but you can control how much you are going to owe the government this year. Most people who own small or home-based businesses end up paying more than they should in taxes simply because they are not taking advantage of all their deduction possibilities, even those that are right around them every day.
You may not realize it, but one of your biggest potential tax savers is sitting in your garage right now. Most people realize that their car can be a tax write-off if it is used for advertising purposes, but the majority of home-based business owners don’t realize that it they may also be eligible for deductions as well.
For example, if you drive your car to the post office to buy stamps for your business or if you drive to the office supply store to stock up on paper clips, you can claim that mileage on your taxes. You can even claim the mileage if your business-related stop was made on the way to picking your daughter up from ballet class or dropping your dog off at the vet. Financial Worries? Lose those worries by adding a second paycheck!
In addition, you can write-off other automobile related expenses such as gas, insurance, and parking costs if they pertain to any business related activity.
Be sure to keep records, however. You will want to have a small notebook in your car at all times so you can jot down your start and stop mileage as well as a note about the business activity in which you are engaged. Keep all gas, parking, and insurance receipts as well if you plan to claim those as business expenses.
If you pay your children an allowance, you can also count these as deductions if you hire them as part of your staff. Any business owner knows that the money he or she pays to employees does not count as part of their profit. The same is true for home-based businesses.
Most business owners also know they can find employees among their own family without raising any eyebrows. The same is true for home-based businesses. You can hire your fourteen year old to help you answer phones, file, or type up correspondence. You can offer your eight year old a job emptying wastebaskets, straightening your office, etc. Then you pay them a certain amount of money every week for their labor.
Again keeping records is essential. Keep track of the hours your children work for you as well as the activities they do. Pay them, if possible, by check from your business account. You can set up a checking or savings account for the children in which the money can be deposited.
Obviously if you worked in a small office building you could deduct the amount of rent you paid for that property from your taxes, as well as the costs of all the equipment and expenses. Well, just because you work out of your home that does not mean you lose out on those deductions.
Chances are you have a small area of your home that is set aside for your business purposes. Now while you cannot write-off the cost of your entire house, you can write-off the cost of that area.
What you do is determine what percentage of your home’s total square feet is dedicated to your business. For example, if your office takes up 10% of your home’s total area and you pay $600 per month for the property, you can claim $60 per month as a business expense which would be $720 per year.
The same formula works for your utilities, such as electricity, water, and telephone (unless you have a separate line just for business). All of your equipment – your computer, printer, scanner, cell phone, printer ink, etc – is also tax deductible.
Remember to keep track of those expenses and hold on to your receipts in order to claim them on your taxes.
When it comes to tax time, no home-based business owner needs to feel afraid. By taking advantage of all your potential deductions and keeping thorough records, you can not only significantly reduce your yearly tax bill, but you can also prepare yourself in the rare event you may be chosen for an audit.