Tax Benefits (AKA Savings) of Home Business!

by Leslie Truex

Dear WAHS Leslie,
I am researching starting a MLM business and often hear of the tax benefits. Can you summarize for a marketing business where I would not be stocking products, what some of these tax advantages are? How about travel? Thanks, Julie from DC

Hi Julie,
This is a great question as many people fail to realize the great tax advantages available in home business. In his book, Multiple Streams of Income, Robert G. Allen reports that you can get an immediate return on your money in a home business. If you're in the 30% tax bracket, every dollar that is categorized as a tax deduction give you a 30% return on your money. Now where else can you see that kind of return.

Let me preface here that I'm not a tax expert. I encourage you to talk to an accountant or at the least visit the IRS's website or get a good book on taxes. Any home business run for the purpose of making money is eligible for business tax deductions including to but not limited to:

1) Start-up kit - If your business has a start up fee and/or kit required to start your business, you can deduct this expense from your taxes. You need to be careful about any product included in your kit. Technically, products purchased for your personal use are NOT tax deductible. Nevertheless, products that are used as part of your presentation (i.e. demos or party plans), are tax deductible. I have even heard of some people deducting their product orders when ordering is a requirement to get paid. Again, this can be a fine line and should be discussed with your tax advisor.

2) Equipment and supplies required to build your business. If you need a computer, printer, headset phone or other equipment, you can deduct this on your taxes. Read the tax form directions carefully as depending on the cost, you may have to depreciate (deducting portions of the equipment's purchase price over time) equipment purchases. Other things you can deduct include folders, pens, paper, printer ink, staples, post-its, binders and anything else you need to buy to run your business.

3) Services required to build your business. You can deduct the cost to build and run a website (i.e. domain name purchase and hosting fees) and online services such as autoresponders or newsletter list management. You can deduct only the part of your internet service that use for business. If you are online 80% for business and 20% for fun, you can deduct 80% of your internet service costs. You cannot deduct your main phone line but you can deduct any business related long distance and services added such as voice mail or three-way calling. If you install a second line into your home for business purposes, you can deduct all fees related to that line.

4) Education, subscriptions, and memberships. If you attended conferences or training programs to help you build you business, you can deduct the expense of this including mileage, course fee, course materials, and hotel and meals (if overnight is required). Any books you buy about building a business, marketing or other topics to help you build your business are tax deductible. If you subscribe to any trade journals or participate in associations related to your business, you can deduct the expenses of those as well.

5) Marketing expenses. Any expenses related to promoting your business are tax deductible including ads you run, professional materials you get printed (i.e. business cards), networking events, and purchasing leads. Include postage costs if you mail promotional literature.

6) Home Office deductions. As long as you don't have an office elsewhere, you can deduct some of your regular home expenses including a portion of your mortgage or rent, and utilities. To determine how much you can deduct, you need to measure your office and determine the percentage your office takes up in your home. For example, if your home is 1000 square feet and your office is 100 square feet, you can deduct 10% (100 sq. feet is 10% of 1000 sq. feet). If your mortgage or rent is $1000 per month, you can deduct $100 per month...that's a $1200 deduction at tax time (12 months multiplied by $100). Plus you can deduct the same 10% (or whatever amount your office percentage) on your utilities.

7) Travel. You can deduct travel expenses that are related to your business like conferences as mentioned above but also, trips to the office store, delivering products, meeting customers, or trips to the book store to buy business related books. Any travel related to getting your business done counts.

8) Retirement. Self-employed people are allowed to put more money in a pretax retirement account than an employee. According to David Bach in his book, Start Late Finish Rich, self-employed people can save up to $41,000 pretax in a SEP IRA or One-Person 401(k)/Profit Sharing plan as opposed to an employee under 50 can only contribute $14,000 to his 401(k) (as of 2004).

Develop a system now for tracking all expenses. If you order services, ebooks or other business related things online, be sure to print out your receipts as well as save them in a folder on your computer (most places email your receipt that you can put in a 'receipt' folder in your email program). File your other receipts in envelopes or folders. Try to categorize them to make it easy during tax time. For example, my phone receipts are separate from my business receipts which are separate from my marketing receipts etc.. Keep your mortgage, utility and bank statements as well. To take a travel deduction, you need to keep track of mileage on paper. You can use one of the travel logs at the office store, use your PDA or any system that works for you as long as its written. When you have completed and filed your taxes, you still want to hold on to all of this paperwork for at least 7 years just in case of an audit.

I'm often surprised when people focus on the cost of business when in fact, the just the home office deduction alone more than make up for most expenses. The most important thing is to get a good book or talk to a tax advisor to help you find these and other great deductions. You can visit the IRS's home business information here:

Tax Guide for Small Business
http://www.irs.gov/publications/p334/index.html

Starting a Business and Keeping Records
http://www.irs.gov/publications/p583/index.html

Business Use of your Home
http://www.irs.gov/publications/p587/index.html

Schedule C - Profit or Loss from Business
http://www.irs.gov/instructions/i1040sc/ar01.html

Self-Employment Tax
http://www.irs.gov/publications/p533/index.html

Tax Withholding and Estimated Tax
http://www.irs.gov/publications/p505/index.html


About the Author: Ask WAHS Leslie is Leslie Truex a stay and work-at-home mom who has been helping people work at home since 1998 with her website Work At Home Success (http://www.workathomesuccess.com). She is also the author of Jobs At Home: A Complete Guide to Finding a Work-At-Home Job. Ask WAHS Leslie is a weekly column. You can submit a question to Ask WAHS Leslie by emailing success@workathomesuccess.com with subject line AskWAHS Leslie.

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