For some business owners, paying taxes can be a bitter pill to swallow. But for those who have a solid bookkeeping system, a good certified public accountant and a solid knowledge of tax law, tax time can be less taxing.
To ready your home business for Uncle Sam, set up a detailed record-keeping system. Keep in mind that although you will operate your business from home, the Internal Revenue Service will treat the part of your home you use for business as a separate entity. Therefore, you must separate your business expenses from your home expenses.
“To keep things in order, separate the receipts when you make the initial purchase. If you are purchasing a household item and a business-related item at the same time, tell the salesperson that you need a different receipt for each,” says Rudy Lewis, president of the National Association of Home-Based Businesses (NAHBB).
Set up a separate business bank account. Keep all business receipts in a separate drawer or filing cabinet. Use a computer program to track and record your expenses and income. And hire a good tax advisor or CPA to assist with the paperwork.
An accountant can help you set up your books and track your expenses, pinpoint the types of deductions you can claim and help you fill out the appropriate tax forms.
Like any business owner, you can claim deductions for such things as office supplies, business travel, and meal and entertainment expenses. But you can also file the “home office” deduction, which includes such items as utilities and repairs. But before you file your return, you must first qualify according to strict guidelines set by the IRS: your office must be your principal place of business; a place where you meet with customers or clients during the normal course of business activity; or a separate structure that is detached from your home.
Moreover, your home office must be used “regularly and exclusively” for business. That means that if you use a corner in your family room to operate, but you also use the room to watch TV, you cannot claim the deduction. However, there are a few exceptions to the “exclusive use” rule. Contact your local IRS office for more information.
Once you qualify, you must calculate the amount of your deduction. To figure the percentage of business use, use the “square footage” or “rooms used” method. To use the square footage method, divide the square footage of the space used for your business by the total square footage of the house. The “rooms used” method requires that you divide the number of rooms used for your business by the total number of rooms in the house. Keep in mind all rooms must be roughly the same size.
Here are a few more deductions you can obtain:
- Rent or mortgage interest. As a renter, you can deduct part of your rent. If you are a home owner, you can deduct a portion of your real estate taxes and qualified mortgage interest (but not principal) payments on your home.
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