Welcome to the best legal tax shelter in the world- you home-based business! As long as you keep good records and can prove that you are trying to earn a reasonable profit, you can begin legally deducting all types of things that were previously non-deductible items!
Do you sell on E-Bay or Amazon? Do you troll garage sales or Goodwill for items that you can re-sell? Do you collect beanie babies, comic books, or baseball cards and re-sell them? Are you an artist or a writer? Do you post your articles on-line? Even if you are not yet earning a profit, keep records! Keep your e-mails, and copies of your receipts, and introduce yourself to a new world of spectacular tax deductions that can legally reduce your taxable income and help you start your new, home-based business!
Here's how to get started!
1. Keep your receipts, even if you just throw them in a big shoebox! Write a little note on top of the receipt that shows what the item was for, and keep it until tax time! Even little things add up! Printer cartridges, paper, postage, thank-you notes, internet access, website costs- anything you buy to help promote your business is deductible! Do you sell on E-Bay or use Paypal? Print out those receipts!
2. Keep track of your mileage- a huge deduction that is often overlooked! Now, if you just have a regular job, you cannot deduct your commuter miles. However, if you have a home-based business, you can deduct all your miles related to your new business! Did you run to IKEA to buy a new desk for your home office? That mileage is deductible! Just keep track with a piece of notepaper or a cheap mileage log in your car. Even if you only travel 500 miles for your business, that is still equals a $250 dollar deduction!
3. Deduct your home office!! Do you have a spare room that you use as an office? You can deduct that, too! The formula is easy, and most tax software will do it for you. Here's how it works! Let's say that your house has a total square footage of 1000 feet. Your home office is 250 square feet. If you divide 1000 by 250, you end up with .25, or 25 percent. That means that 25% of all your home utilities, mortgage interest, rent, repairs, and improvements. The home office deduction is available for renters and homeowners. According to the IRS, your “home office" can be in a condo, house, apartment, or even a mobile home or a boat, as long as it is your actual residence.
4. You must be able to prove that you are trying to make a profit, so the IRS does not disallow your deductions as a “hobby loss". A “hobby loss" is where the IRS determines that you are basically just playing around, and not actually trying to have a legitimate business. This does a lot of Americans a disservice, because many small business owners do not show actual profits for many years, but they are still trying to run their businesses legitimately. The IRS likes taxpayers to show a profit within 5 years, but this is a loose guideline. I always use Amazon as an example- Amazon didn't post their first profitable quarter until seven years after being in business! Also, many writers, artists, and other creative folks do not post any profits until many years later. If you have the records, you can PROVE that you were trying to make money! Just stick to your guns and keep your bookkeeping paperwork for at least six years.
5. Then, don't forget, if you are self-employed (have your own business), you can write off a lot of items that you can't write off if you are just working for your regular employer. For example, if you are a part-time writer, you can write off magazine subscriptions (related to your business), professional fees (such as web design and bookkeeping), business books, entertaining potential clients, travel, writing forums, conferences, etc. Almost everything related to your business can be a legitimate expense, as long as you can prove it helps you run your business, be more profitable, or helps promote what you do or sell.
So, follow your dreams! Become your own boss and start a part-time home-based business! You'll save a lot of money on your taxes, do something you really enjoy, and maybe make some profit along the way!
Christine P Silva, BA, CRTP, lives in California with her husband, two children, and three spoiled cats. She earned her undergraduate degree from San Jose State University, and her advanced accounting certificate and California tax registration from Cosumnes River College. She is the founder of the Sacramento Volunteer Tax Preparation Clinic, a free service offering tax assistance to low income and Spanish-speaking taxpayers.