TAX ADVANTAGES FOR HOME BASED BUSINESSES

HOUSE

First, determine the % sqft of your home dedicated solely to business. *Must be used regularly and exclusively for your trade or business; your principal place of business; or place where you meet/deal with customers in the normal course of your trade or business. Or a separate structure used in connection with your trade or business* Apply that % to you mortage/rent, utilities, trash, security system, etc to calculate the amount of these expenses that are allowable as a business deduction. Home telephone service cannot be deducted unless a separate line is used. However, cell phones use can be deducted based on the % used for business purposes. (As a home based business owner, keep in mind, everyone is a “potential” client. Consider answering your phone in such a manner that you advertise your company to any and every caller. This would merit a full deduction.)

AUTOMOBILE

You can take the standard mileage rate or actual expenses. The standard mileage requires you keep a log for 2-4 months. Designate every trip (and the associated mileage) as business or personal. (Consider swinging by the post office after you drop “Susie” off at Soccer practice, or put a flyer out at the grocery store to qualify that “trip” as business.) Then calculate a standard business/personal ratio and apply that to mileage (a deduction of $0.485-2007 and $0.505-2008), gas, insurance, maintenance, etc. NOTE: parking fees and tolls for business purposes are still fully deductible in addition to the standard deduction. Also, consider looking into the alternative motor vehicle tax credit (Form 8910) for a tax credit for energy efficient vehicles. NOTE: you can not deduct the remainder of your car as an advertising expense if you have signs on your automobile!

TRAVEL

Business Travel expenses are 100% deductible. These expenses include transportation to and from destination, 50% of meals and entertainment, lodging, telephone, tips to the bell boy, etc. Consider getting your dry cleaning done while on a business trip because it is fully deductible. NOTE: (home based travel agents) Your personal travel can too be considered “business” if you are familiarizing yourself with a resort, hotel, city, etc. Set off a few hours of your trip to get a manager to take you on a well documented tour of the facility. Some agencies have site inspection forms for this purpose. Also, if your spouse and children are employees (discussed later), they can participate in the familiarization process and their expenses can be fully deductible as well.

CHILDREN EMPLOYEES

Hire your children to put flyers out, answer phones, clean your office. You can deduct up to $9,150 per child and it still be TAX FREE to the child and fully deductible as a business expense to you. $5,150 dollars can be paid in wages and an additional $4,000 can be put into an IRA on their behalf (to save for college, a car, etc). Documentation is required. Amount paid for the services must be reasonable and child must be able to perform duties to benefit the business (no 3 yr olds). For instance, at $10/hr your child must work about 19hrs/wk to meet the $9,150 or 10 hrs/wk to meet the $5,150 mark. These wages are not subject to social security or Medicare taxes.

HEALTH/MEDICAL EXPENSES

As a home based business owner you can get 100% of your ENTIRE family’s health insurance and medical expenses paid through your business. How? First the HBB owner employs his/her spouse. Once an employee, the spouse can enter into an arrangement known as a Health Expense Reimbursement Employee Benefit Plan. This plan need not be insured or in writing (a verbal agreement will suffice). The plan covers contributions, directly or indirectly, to health insurance plans, health savings accounts, or reimbursements/payments for medical expenses. Plan provides benefits for employee, spouse, and dependants and is exempt to the employee (not on W2) and deductible to your business!!!

OTHER EXPENSES

Advertising, bank charges, donations to business organizations, education expenses, licenses and regulatory fees, subscriptions to trade/professionals publications

Circular 230 Disclaimer: Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing, or recommending to another party and transaction or matter addressed herein.