Tax Season is always a stressful time of year. How can you make filing taxes for a home based business easier? Document, document, document! This can’t be stressed enough. Accurate and up to date files must be maintained in order to be allowed as deductions for a home based business. If you don’t feel qualified to do your own taxes, then you would be wise to use a tax preparer. There is great tax preparing software available that will easily walk you through the steps and forms. Either option you choose you can deduct the cost of the software or the preparer.
First of all, besides documentation, one of the easiest ways to simplify taxes is by using a worksheet to help remember and organize the items that can be deducted. A worksheet will be available in google docs to you with the link at the end of this post. You can modify it as you need. It was produced on an excel file, so it can be easily changed or modified.(The fields that are in grey use formula’s so don’t delete or change them or the form will not be accurate. You will want to add your name and the business information to the spaces in green) This worksheet has been a time saver for me as I use it every year and save it in my tax file, then the next year I have the figures from the last year to compare. This form does not include all of the available deductions, but it does include the most common. Listed below is some of the information on the basic deductions with links to more in-depth information. If you are not sure what deductions are allowed, please consult a tax specialist.
1. Maintain good records all year.
The easiest way to ensure your yearly tax information is submitted correctly is to keep good records all year, avoiding the tax time rush of searching for lost receipts, calculating mileage and trying to piece together months-old credit card bills.
Keep all receipts, and make notes on the back of receipts about their business purposes, especially for smaller purchases like a business lunches or printer cartridges. Those little purchases can add up to big deductions at tax time. If you don’t like keeping a lot of paper receipts around, there are smartphone apps that allow you to take photos of receipts and file them away to better track your expenses.
Don’t rely on credit card statements – you’ll need itemized records of what was actually purchased. You can have an envelope in your car to hold the receipts you receive until you return home to your files. Then they won’t get thrown away in haste.
2. Keep track of startup costs.
If this is the year you’ve launched a home-based business, you’ll be able to deduct startup costs as capital expenses. You can deduct up to $10,000 the first year you’re in business, and the remainder of your startup costs should be deducted in equal amounts over the next 15 years.
For your AP business, you probably won’t have that big of a start up costs, but this would include items like, but not limited to freezers, coolers, printers, laptops and storage areas.
3. Measure your office.
The requirements for the home office deduction state that a portion of your residence be used regularly and exclusively for business purposes, but this space need not actually be an “office.” It can be a conference room, a garage area, storage room, or some other type of business usage. If you do have an area that you use regularly and exclusively for business, the tax law permits you to deduct a portion of certain expenses relating to your home. Once you determine the size of your room, you can use the method that works best for you for your deduction.
For most types of home office expenses, the amount you may deduct depends primarily on the percentage of the space in the residence that is used for business.
There are two common ways to the business portion of your home:
• number of rooms, or
• Square footage.
The first method (number of rooms) looks at the number of rooms used for business, divided by the total number of rooms in your house.
The second method looks at the square footage of the space used for business, divided by the total square footage of the house. Most of your home expenses (such as rent or real estate taxes and mortgage interest) must be multiplied by the larger of these two fractions to determine the portion that’s deductible as a home office.
For a more in depth look at the home office expense check out this link
4. Track your ongoing expenses, like mileage, utilities and phone bills.
Beginning January 1, 2015, the standard mileage rate for using a vehicle for business purposes was 57.5 cents per mile for business miles driven. Carefully track each driving trip you make for work purposes–because you can’t claim personal miles driven, it’s not enough to simply tally up your vehicle’s total mileage at the end of the year.
I use a small mileage booklet in my vehicle and when I start my car I think about the reason that I am driving, If it is business related, then I record the mileage in my booklet. At the end of the year, I have all the mileage written down.
Likewise, if you have a home office, you can deduct a portion of your home’s utility bills, including heating and electricity. This also applies to internet and phone bills. In the case of your internet bill, you’ll likely only be able to claim a portion of your expense since you’re probably using some of your home connection for non-work purposes.
I am attaching the form for the booklet that I have created. I copied it off at a copy center, cut and bound it in to a little booklet form.
5. Don’t forget health insurance.
Self-employed individuals can deduct the cost of health insurance for themselves and their families, if applicable. But keep in mind that if you qualify for health insurance coverage under a spouse or partner’s plan (or another employer-subsidized plan), you won’t be eligible for this deduction.
6. Hire Your Family
Another tax-saving idea is to hire your child or a child who lives in your neighborhood for your business, says Kristin Oberlander, a spokesperson for the National Association for the Self-Employed, since you can deduct their wages as a business expense. “Write up a job description, cut them a company check every pay period, fill out a W-2,” she says. “Any child can earn up to $6,300 tax free. Plus, your child learns about responsibility and earning a paycheck.”
7. Pay Yourself
Home-based entrepreneurs sometimes forget to pay themselves by setting up an IRA or other retirement vehicle, says Gloria D. Birnkrant, a CPA and partner with NSBN, a tax and business-planning firm in Beverly Hills, California, which allows you to put pre-tax money toward your retirement. “Even if the monthly amounts start out small, you will be surprised how soon you have built a nice account, with the advantage of a tax deduction,” she says.
These are just a few of the deductions that are available to a person who has a home based business. If you have already filed this year, then start now for next year. It will be a benefit for you. If you have never filed your home office on your taxes or claimed the home based business, here is a link from you tube that will help you to see why you need a home based business and the benefits from it.
Why do I need a home based business?
If you have ever tried to fill out a schedule C for your taxes, you can feel overwhelmed. Don’t despair; this is a video on how to fill it out. Great information for the beginner.
How to fill out a Schedule C form for deductions
Good luck to you in all your tax endeavors. Don’t sweat it, just record it.
Here is the link for the worksheet, download it as an excel file for edit capabilities.
Stacee Izatt RSM