I know that I do…
Did you know that starting an online business, or any work-from-home business will allow you tax write-offs?
Many of us know that when we buy a home, the interest on a mortgage loan is an instant tax write-off. But in addition, if you start a business at home, any type business, you can add to those tax write-offs.
You may think that you need a business licence with your local city or county, or a registered LLC (Limited Liability Corporation) within your state to be able to take advantage of tax breaks, but not necessarily in the beginning. A business licence is mainly for those who make and/or distribute a product or service so that appropriate taxes are paid locally, or if you have or intend to have employees within your company or business. Having a LLC offers legal protection so that if you encounter a law suit, it is limited to the LLC entity. But this is only the case if you are dealing with very large assets, for example if you were to go into real estate and own rental properties. But in the same token, it doesn’t hurt to talk to a tax accountant or tax lawyer to see what, if any, advantages there are in the future of your at-home business concerning these types of registries.
Small internet business owners or “Entrepreneurs” that run a home-based business have very low “overhead” costs, but these costs can still amount to a fair amount of tax write-offs.
Just as you prepare your yearly taxes if you have a regular employer, you can still file your business in tandem under your social security number here in the United States, other countries may be different.
Deducting Household Costs for Office Space
When you a start a business from within your home, to where you are working for yourself, being that you are not on a payroll (commonly referred to as a W-2 employee), you are considered to having costs in running your business.
The thing to remember here is that you can only be taxed on your profit, not your revenue. The taxes on your revenue will be discussed in a later post. Right now, lets focus on your yearly business deductions for your at-home business.
The attractive thing here is the fact when you start your own at-home business, you are pretty much already paying for your office space. Therefore, creating “overhead” costs that now become tax deductions.
Allow me to give you an example as to give you a clearer picture and frame of reference:
You walk into your favorite store to buy something you need. As you drive into the parking lot, you take notice of the landscape in the front. The trees are well trimmed, the grass is mowed and manicured, and you also notice that it has all just been watered.
While you are shopping, you take advantage of the bathroom and wash your hands. While you wash your hands, you notice how clean the bathroom is.
As you continue your shopping trip, you are able to see items on the shelves clearly due to the overhead lighting. Once you have found what you needed, now you decide to go to the self-checkout and pay for your items and leave.
Now, in this small little story you have encountered many business costs that are considered write-offs.
- Housekeeping or Janitorial
You are thinking now, how does this apply to my home? or if you don’t own your home and you are renting the place where you live, how does or doesn’t apply. It does, and here’s how.
When you run your own business out of where you live, you will have an area in your home where you do all of your work, or the majority of it. Everyone nowadays, has a computer in their home. It has become a standard fixture like your refrigerator or television. In addition, many of us have set aside an area where our computer sits, usually a desk, close to a printer, and in some cases where we have all of our household documents or bills. We sit down and pay our bills, do some internet surfing, or even do some shopping. This space can be considered your business office as well, due to the mere fact that you we be using this area to run your business.
Here is the way to find out business deductions from your household…
I will give a hypothetical situation to explain: (this will apply to the home owner as well as the renter)
In the instance that you own your home, let’s say your home has a small area or room that is considered a den; or you have a room that is no longer being used for other than storage, or maybe a hobby room perhaps, and you decide to convert this space into your “at home office.”
Now it’s time to get out your measuring tape and your old math skills to formulate what you can deduct for business expenses.
For demonstration purposes, we will use a room to convert into your office.
Measure the room that you will be using from one wall to the other, then measure the length between the opposing walls.
Just to make things easy, we will make the measurements of our hypothetical room (office) 20 feet from one wall to the other and 30 feet from the other wall to the other.
Putting the square footage equation into play (L x W) we will come up with the answer of 600 square feet.
Now we must figure out the percentage of your office in relation to the size of your house.
Lets say you have a home that is 3300 square feet….. now we divide our office into the total size of the house:
600 divided by 3300 = 0.1818, or 18%
Now that we have established the percentage of your home that you will be using for your business, now we can establish the deductions.
I mentioned earlier, for a homeowner, that your mortgage interest is an automatic write-off. That doesn’t change. What changes is the additional write-offs you get to use as “business expenses.” Just as I explained in the shopping trip story, the same applies here.
Here is where we can figure out our deductions….
Now that we have established the magic number of 18% here is what you get to claim as expenses:
18% of –
Landscaper (if you have one)
Housekeeper (if you have one)
House Phone (Landline) – Yes, there are a few that still have a phone in the home. Having a cellphone will be covered in another post.
Let’s Evaluate the Deductions
Now that you have established the percentage of your business costs within your home, lets see what your year end deductions can amount to.
Again, all of these numbers that I am putting together are purely hypothetical. You will have to look at your monthly bills to establish what your actual deductions will be.
Mortgage or Rent-
We are going to say that our home mortgage is $2000 per month. Many will think that is high and many will think it’s low. But I’ll use this figure for reference:
$2000 x 12 = $24,000
$24,000 x 0.18 = $4320
If you rent your home or apartment, use your monthly rent in place of the mortgage figure.
Some will have a combined electric and gas bill, some will have separate services, but for the sake of argument, we will combine them.
Let’s say that your average electric and gas bill is approximately $200 each month:
$200 x 12 = $2400
$2400 x 0.18 = $432
Water bills vary from area to area, so let’s just pull a random number out, how about $60 each month:
$60 x 12 = $720
$720 x 0.18 = $129.60
Your monthly garbage bill can be included in this as well. Again, just to randomly pick a figure out of the air, we will say your monthly garbage bill is $50.
$50 x 12 = $600
$600 x 0.18 = $108
There are other services for your home that you can take the same 18% out of as business operating expenses, such as housekeeping, landscaping, phone, and internet if you pay for these services for your home.
If you are a renter, in many cases, some of these types of services are included in your rent payment and can only take your calculated business percentage from your monthly rent payment.
Let’s put it all together..
We have put together the basic numbers of our business costs, now let’s see how they add up:
Just with the basics together, you can see that you accumulated almost a $5000 write-off.
This write-off deducts from your “taxable income” and can make a big difference of which tax bracket that you will fall under. In addition, the cost of using whichever tax service to prepare your yearly taxes is a write-off for the following year.
Home Maintenance and Repair
We all have to keep our homes in constant repair, whether it be the toilet backing up, or roof needs repairing, or it is time for new paint on the outside. Well, this applies to your office as well.
The 18% write-off applies to this as well, but I can’t stress this enough, you need advice from a tax preparing official to guide you in what exactly can be written off.
It would be found questionable if you tried to write-off 18% for a new bedroom set that you bought for your master bedroom.
These things have been tried in attempts to get bigger tax write-offs. Unfortunately, this practice can get you into tax problems and possibly set you up for a tax audit. This is something that nobody wants to go through.
One of the best ways to protect yourself from “tax trouble” in the first year of business is to do one of two things:
♦ Consult a tax official
♦ Not to pre-plan your tax deductions
Let’s face it, the tax code is always changing and to actually sit down and attempt to figure it out yourself by reading the large phone book sized publication of the US Tax Code is as appealing as watching paint dry. Personally, I don’t have the time or the patience. Do you??
I would much rather sit down with someone who knows and can guide me in what I can and can’t do when it’s concerning taxes. I never want to be on the bad side of the IRS.
Always remember to keep receipts, paid bills, and cancelled checks to account for your business spending and tax deductions.
Just a Word in Closing
I have been in business for myself, as well as my wife, for over 10 years. My business has been part-time while holding down a full-time job. My wife has been running her own full-time Bookkeeping business from home.
Throughout the years of meetings with our Tax Accountant, the subject has come up many times where many small businesses fold due to improper tax preparation to where these small business owe so much in taxes that it forces them to either bankrupt or sell their business or business assests in order to pay the back-taxes.
Yes, having your own business can offer great tax benefits. But, like all things in life, we must learn what we can and cannot do. This is why I emphasize consulting with a tax official to make sure that while you are on your path to financial freedom, you don’t fall into a pit of financial ruin because of taxes.
In addition, I will posting further on this site of how to make further write-offs to aid in tax breaks. As a business owner, you can have many write-offs to be able to keep more money in your pocket to ensure that financial freedom you dream of.
If you have any comments about this post or would like to share your story, good or bad, please feel free to share them below as well.
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