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        Home Office Deduction, Expenses and Small Business Tax Tips

        Another AHBBO Article
        Are YOU Leaving Money On The Table?

        © 2013 Elena Fawkner

        For those of us in the U.S., tax time is here again.  For those
        of you elsewhere, tax time is always around the corner.  Oh
        joy, I hear you say.  Well, if you're contemplating an online
        home-based business, it may be just that.  Really.  Here's

        Are you ready to start making money with, say, affiliate
        programs or by creating your own information product, but
        haven't really got off the ground yet because you're stuck
        in the stage of thinking you have to learn everything there
        is to learn about internet marketing before you can start? 
        (Which you don't, but that's a whole other article.)  How
        much money have you spent on e-books and other
        information products in your quest for the holy grail?  How
        much money are you spending on your ISP every month?
        How much money have you spent on what appeared to
        be promising online business programs only to see them bite
        the dust?  And what about ALL that software you've bought
        but never used?

        Well, even if you haven't made a dime yet, if you have a
        "genuine profit motive", start thinking outside the paradigm
        of the *would-be* online business owner and start thinking
        from the perspective of one who is *already* in business. 

        What does that have to do with tax?  Everything.

        If you have a *genuine* profit motive for what you're doing,
        then you're in business.  If you're in business, you can
        deduct business-related expenses against business and (if
        you're a sole proprietor), personal, income.  Including ISP
        fees, including information products, including "secret marketing
        site" membership fees.  All of it. 

        See where I'm going with this?

        Even fees for what turn out to be bogus programs can be
        deducted if you incurred them in pursuit of business profit. 
        And while we're on the subject of being hoodwinked, let's
        just get that one out of the way right here.  We're ALL
        suckered into falling for at *least* one - it's called the
        school of hard knocks - so don't dud yourself out of a
        righteous deduction just because you're feeling ever so
        slightly foolish for having been suckered, against your
        usually MUCH better judgment, into believing that what
        sounded too good to be true wasn't.  Even though it was.
        Repeat after me - a deduction is a deduction is a deduction. 
        All that's required is that you incurred the expense with the
        motivation to make a profit. 

        Now, a word of caution here. You can't deduct expenses
        incurred in pursuit of illegal activities so I wouldn't try and
        claim an investment in a pyramid or ponzi scheme on your
        tax return.  But if all you did was fall for a sales pitch for a
        program that, if successful, would not have been illegal,
        and it was a business-related expense, go for it.  So long as
        you had a genuine profit motive when you handed over the

        It gets even better.  (By the way, this is all U.S. stuff we're
        talking here.  Check your local tax laws.  Many countries will
        have something similar to what I'm about to talk about.) 

        Here's where it gets interesting.  If you work your business
        out of your home, in a room or a part of a room that you use
        *exclusively* and *regularly* for your business AND that area
        is also your principal place of business, you may qualify for the
        home office deduction.  Even if you also work at a job outside
        the home. 

        And when I say "exclusively"  I MEAN exclusively - no children
        using your computer for their homework or to play computer
        games, no personal papers in your work desk, no late-night
        chatrooms (or less savory online pursuits if you get my drift),
        no online affairs, no television in the room.

        You may not be able to apply the home-office deduction
        against *this* year's income (as we'll see in a minute) but you
        will be able to apply it against profits generated in future

        So, why all the emphasis on "genuine profit motive"?  The
        movement towards easily-started online businesses has
        sprouted an industry of so-called tax experts who would
        have you believe that anyone can reap the benefits of home
        business tax breaks simply by starting a "home based
        business".  They basically try and convince you that
        anyone can pretend to be running a home-based business
        and thus qualify.  Not so.  You need to be running a real
        business, not engaging in a hobby or a sham.  What
        distinguishes a real business from a mere hobby?  You
        guessed it - a profit motive. 

        Believe me when I tell you, if you're planning on taking
        business deductions, you'd better be able to prove to the
        IRS that you have a genuine profit motive.  How do you do
        that?  By keeping proper books and records.  By keeping
        business and personal expenses separate.  By keeping business
        and personal income separate.  By running a genuine business,
        in other words.

        Here's how it works.

        Let's say you have a spare room in your house that you
        use exclusively as a home office.  Over the past 12 months,
        you've bought a computer, desk, chair, printer and fax
        machine.  You've decided that you want to start a home-
        based online business on the side while you continue to work
        in your job.  You spend several hours a day researching
        ideas for your new business and you spend a small fortune
        on your high-speed internet connection, and various
        information products relevant to your area of interest.

        Because you're running a business, one of the first things
        you're going to want to do is get a system for your business
        records set up.

        Keep a record of all expenses as they're incurred so that
        when tax time comes around, everything is at your
        fingertips.  I use Excel spreadsheets for this - one
        spreadsheet for every expense category.  Here are the
        categories I use (use whatever categories make sense for
        your business though):

        Advertising and promotion
        Web Hosting and Domain Name Registration Fees
        ISP/Cable Modem Fees
        Office Expenses
        Content Subscription Fees
        Bank Charges
        Books and Magazines
        Bad Debts
        Home Office Deduction

        * Usually has to be depreciated over several years unless
        it's software that needs to be updated frequently such as
        anti-virus software.

        ** You can either depreciate these items over time or you
        can write off 100% during the year of acquisition up to a
        maximum of around $20,000.

        *** If you only have one phone, you'll need to apportion
        expenses between personal and business.  On the other
        hand, if you have a second line exclusively for you business,
        you can write off 100% of expenses for the second line.

        Every time I pay a business expense, I enter the details
        in the appropriate spreadsheet.  Very easy.

        Then, when the time comes to file your tax return, you
        just need to prepare a Schedule C (for individual taxpayers).
        If your business makes a loss (i.e., the expenses you
        pay out are more than the revenue you bring in from your
        business), that loss is deducted from your income from all
        sources, thereby reducing your taxes.

        But, best of all, if you qualify for the home office deduction,
        you can take a proportionate share of your mortgage or rent
        payments and your utilities and apply them as a deduction
        against your business profits, but only to the point where the
        profit from your business equals zero.  In other words, the
        home office deduction cannot be used to create a loss
        situation.  But even if you can't deduct it this year (because
        your business has already made a loss), it's not lost.  You
        can carry it forward to future years to be applied against
        future profits.

        So, as you can see, even if you're only in the information-
        gathering/learning stage of your business, if you have a
        profit motive you're nonetheless in business and you can
        and should be writing off your business expenses even if
        you're yet to start generating revenues.

        Make sure you keep proper records and substantiate all
        expenses though.  The IRS is, of course, well aware of the
        potential for abuse of home business tax deductions and
        will be paying close attention.  That's fine though.  If you
        have a profit motive, you ARE running a business and
        you're *entitled* to take any legitimate deductions that
        are available to you.  To do anything less is to leave money
        on the table.


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        Elena Fawkner is editor of Home-Based Business Online. Best business ideas and opportunities for your home-based or online business.

        Copyright 1998-2017, AHBBO.com. All rights are reserved. Tuesday, 26-Jan-2021 03:07:45 CST