Home Business Advice: Tax Records

© by Patricia Brucoli

It’s never too early to start putting your home business tax receipts and records together. Why wait and then be in a state of chaos! Why wait until April 14th? I don’t know about you, but when I am expecting a refund, I do my taxes the minute I get my last W2, 1099 or receipt in hand - usually by February 1!

It really helps to keep these records in one place all year. January 1, I clear out the previous year, from my ‘taxes’ folder, put them in a big envelope, and start tracking again for the new year! The folder contains, for instance,  credit card statements, bank records, paypal activity reports, office supply receipts, prescription receipts, utility bills, and all other documentation to support my deductions.

The other thing you want to think about ahead of time, is how much you will pay a tax preparer if you plop a big box of papers down on his or her desk, to sort it all out. Extra. It’s bad enough what they charge for the various forms you will need to go along with your regular tax return. So if you are organized, you will save money, as well as feel better!

Also in January, I create a simple spreadsheet, that details who i paid, for what (by category), the amount I paid, and the date. (Categories may include advertising, membership dues, office supplies, computer services, technical support, utilities, instruction, etc.)

Each column has a simple formula to keep the total spent for each category and a grand total. In that these formulas automatically recalculate whenever you make a new entry, I can  keep track of how much was being spent going along.

When you itemize deductions for a home business, you also can deduct a percentage of rent for your office space - as long as this space is only used for your business. It can be square feet in a common area, but some advise if it is a room with a door that this is best. You can also take a percentage of your phone, electric, and computer services and maintenenace. Computer maintenenace includes software applications, such as spyware, virus protection, etc. Computer services include web hosting, domain name registration fees, tech support, internet access, etc.

You can also deduct prescriptions and money spent for medical care or insurance. You can deduct fees for your car, such as registration and license fees. You do not need to use your car in your business to the extent that  a traveling salesperson would, but even if you use the car to purchase office supplies, etc., this is legitimate.  Of course, bridge tolls and gasoline used in the course of your business are also deductions.  Another car related deduction is if you have your logo or advertising for your business on your car, there is a greater advantage. This is because even going to the grocery store, you are advertising. This is legitimate.

If you take any courses or pay for marketing or other business related seminars, in print or other media, these are deductible as well.

There is always the other side, too, where you keep a home business spreadsheet with your income - commissions, fees, etc., with the same broad categories, who, what, when, how much was paid.

If you not only look forward to your refund, but depend on it for survival, I suggest you set up a direct deposit. It greatly speeds up the process, as well as ensures your money will not get temporarily or permanently ‘lost in the mail’.

The IRS has a great website where you can download forms, schedules and instructions, so you know to dot your I’s and cross your T’s (and to be sure you are getting adequate and fair service from your preparer). http://www.irs.com/  .  Having said that, I strongly caution you to have documentation for every deduction you take and to discuss any ‘gray areas’ with a professional tax advisor that you don’t understand. They may not ask to see your ‘proof’, but the IRS might.

The laws change, but as of last year’s tax laws (2005), the word was that the IRS will allow you to deduct losses - that is if your expenses outpace your income as they usually will in a start-up, for 3 years. If after 3 years you are still not in profit, I believe they will call your business a ‘hobby’, and as such you would not be entitled to deduct your business expenses.

It is a great feeling to know your government supports your efforts to start a business by allowing you to recover a percentage of your business expenses. Don’t abuse the privledge, not just because you have ethics, and you don’t want to pay a fine or penalty, but because once a small business or home business has anything irregular or questionable come to their attention, I have heard they will audit you for many years to come.