Taking Advantage Of Tax Write-offs For Your Small Business
If you have a small business, no matter what kind it may be
, there are certain tax write-offs that you can taken advantage of if you are smart. The key is to know exactly where they lie, and how to maximize your use of them.
First, take the home-office deduction if you can. This can be a bit confusing--even tax-accounting experts don't agree on whether you should put in for it.
The deduction is for depreciation and operating costs for maintaining an office, workshop or other business site in the home. Figure out the square footage of that space and divide it by the home's total livable space.
You can typically deduct not only the business's share of depreciation but also a share of your home's overall utility costs. Begin by figuring out what your utility bill would be if you did not work at home, rather than just deducting the percentage of utility expenses to match the percentage of physical space occupied by the office.
The former deduction will be a lot higher, because you might not be running the furnace at all, for example, if you worked outside your home. You've got to make absolutely sure that the space is solely dedicated to your business, or it does not qualify for the deduction.
Even if you've just got a closet where you stuff your winter clothes, and it's in the office that you're wanting to deduct, you can't do it. The IRS is very specific that the space you write off must be exclusively for business use.
Another reason that some home business owners refrain from taking the deduction is that, if you've physically improved your home, you must subtract from the home's new tax basis the amount of home-improvement cost that is proportional to the space that you claimed in the home-office deduction. After all, if you have never claimed the deduction, you can exempt the entire capital gain when you sell your house, and you're in a completely 'white' area."
If you have claimed the home-office deduction, you are in a gray area on this when you sell your house. Perhaps the biggest reason for steering clear is that the presence of a Form 8829 in a tax return, used to calculate the deduction, is widely considered a red flag for IRS auditors because many home-office owners abuse the provision.
You might be surprised how much of your day-to-day expenditures are deductible as business expenses, especially in the early going as you're setting up your company and shelling out hundreds and perhaps thousands of dollars to outfit things. In general, you always underestimate what you spend in cash.
On the other hand, a gigantic trap for home business owners is trying to deduct an entire expense as if it is attributable only to the business, when that just is not the case. For example, you may use your laptop for twelve hours a day for your company; but if your kids also use it in the evening to play video games, you should keep a log to detail the different uses, and you can deduct the percentage of time that you are using the equipment.
One way that IRS rules favor a home-based business is that you can deduct the expense of the first mile that you drive away from your house each day, whereas people who are not self-employed can't deduct their commuting expenses. Take advantage of this provision by stitching a business component into each trip even if you are going to run some personal errands along the way.
When it comes down to it, a home business offers plenty of lifestyle-related advantages, but it also benefits from some great tax write-off possibilities. Take the time to learn more about them and maximize your home-based business's financial success.
Remember, you are not being dishonest, you are just being smart. As long as you are very careful to stay within the guidelines of the law, you are doing nothing wrong and stand only to benefit.
by: Jack Landry
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