Home Business Tax Deductions
Running your own business
The ultimate tax shelter
Turn yourself into a business owner and cut your tax bill.
It's almost that simple.
To be in business, you merely declare it. If you make candles and sell them at the craft show, bake pies for bingo night or fix your neighbors' leaky faucets on the side, creating a business may provide some tax advantages for you.
Being employed full or part-time doesn't prevent you from having another vocation on the side.
Before declaring yourself a business, do some research first. There are many ways to run your business, with advantages and disadvantages for each. For the small entrepreneur just starting out, a sole proprietorship may be the simplest. These small businesses are often referred to as 'Owner/Manager' operations. You sell a product or service, or consult for some form of payment. In certain jurisdictions, such as Quebec, you will have to register your business.
You may also want to register for GST/HST and QST in order to recover taxes where possible. By doing so, you can turn losses into tax deductions.
Declaring a business is one of the key steps towards what many consider the ultimate tax-planning strategy. It is not complicated, expensive or difficult to do and incorporation is not required. Incorporation and limited partnerships are a good idea if you wish to reduce your overall direct liability.
Owning your own business, even on the side, allows you to start declaring and deducting legitimate business expenses such as:
- the use of your car for business (delivering pies, for example)
- home office expenses (telephone, electricity, etc.)
- travel costs to attend trade shows, fairs or conferences
Your business doesn't have to make a profit, but you have to at least establish a 'reasonable expectation of profit.' In the first few years of operations, for most small businesses, it is reasonable to expect that you will be putting your profits, and more, back into your business to help it grow. Although the ultimate question is whether you have the intent to make a profit, the determination of your motive is made by reference to objective standards, taking into account all of the facts and circumstances.
Some businesses take longer to get off the ground than others, especially part-time endeavours. As a rule of thumb, you should set a goal to be profitable in the second or third year. While these profits may not recover the losses you incurred to start the business, they will indicate to Canada Customs and Revenue Agency that your operation is becoming 'established.'
Creating a business for perpetual loss is an invitation for perpetual audits. Be aware, and be prepared with well-documented receipts.
Being in business for yourself has many advantages, but it is not for everyone. Starting part-time, 'on the side,' may be a good way for you to test the water, see how you like your new venture and realize some excellent tax savings for your indulgence.
Make a hobby a business
An effective tax-planning strategy may be to convert your personal hobby into a business. For example, if your hobby is racing stock cars, you can convert that hobby into a business. Have cards and stationary printed, run ads looking for sponsors and race for prize money. This way, your hobby has the image and appearance of a business. A reasonable expectation of profit can come from the potential to win a few races and pick up additional sponsors. Furthermore, the money you spend setting up your business (buying cars, tools, fuel, etc.) might be deductible.
To qualify as business deductions, your expenses must be:
- paid or incurred during the taxable year
- connected with the conduct of a trade or business
- reasonable or required for the operation, sales or marketing of the business.
Many people are converting hobbies into businesses. Hobbies-turned-ventures are an excellent way to 'have your cake and eat it too.' No one says you can't have fun with your business, whatever it may be. But please remember, you must be able to show that you have a reasonable expectation of earning a profit, at some point down the road, from your endeavours.
Tax Savings Benefits of Owning Your Own Business in the United States
With your own business you may be able to write off all or a percent of the following items
- things that you can't when you work for someone else!
Health Insurance Premiums
Gas & Electric
Internet Service Provider
Computer Hardware, Software, & Repairs
Car Related Items:
Cell Phone or Pager
Auto Principal and Interest
Gas & Insurance
Repairs, Cleaning, and Maintenance
Plus things like your:
Nursing License Renewal
Uniforms and Cleaning
Travel & Meals to CE Seminars
Entertainment with Clients & Business Associates
As of 2003 your Health Insurances and Long Term Health Care Insurance is a 100% business deduction!
THE BOTTOM LINE - THIS ALL REDUCES THE INCOME YOU HAVE TO PAY TAXES ON - MUCH OF IT YOU'D HAVE TO PAY FOR IF YOU DIDN'T HAVE A BUSINESS!!
Tax Deductions for Businesses & Self-Employed
Here's how you can get the tax deductions you're entitled to:
For some business owners, paying taxes can be a bitter pill to swallow. But for those who have a solid bookkeeping system, a good certified public accountant and a solid knowledge of tax law, tax time can be less taxing.
To ready your home business for Uncle Sam, set up a detailed recordkeeping system. Keep in mind that although you will operate your business from home, the Internal Revenue Service will treat the part of your home you use for business as a separate entity. Therefore you must separate your business expenses from your home expenses.
To keep things in order, separate the receipts when you make the initial purchase. If you are purchasing a household item and a business-related item at the same time, tell the salesperson that you need a different receipt for each.
Set up a separate business bank account. Keep all business receipts in a separate drawer or filing cabinet. Use a computer program to track and record your expenses and income. And hire a good tax advisor or CPA to assist with the paperwork.
An accountant can help you set up your books and track your expenses, pinpoint the types of tax deductions you can claim and help you fill out the appropriate tax forms.
Like any business owner, you can claim tax deductions for such things as office supplies, business travel, and meal and entertainment expenses. But you can also file the "home office" tax deductions, which includes such items as utilities and repairs. But before you file your return, you must first qualify according to strict guidelines set by the IRS: your office must be your principal place of business; a place where you meet with customers or clients during the normal course of business activity; or a separate structure that is detached from your home.
Moreover, your home office must be used "regularly and exclusively" for business. That means that if you use a corner in your family room to operate, but you also use the room to watch TV, you cannot claim the tax deduction. However, there are a few exceptions to the "exclusive use" rule. Contact your local IRS office for more information.
Once you qualify, you must calculate the amount of your tax deductions. To figure the percentage of business use, use the "square footage" or "rooms used" method. To use the square footage method, divide the square footage of the space used for your business by the total square footage of the house. The "rooms used" method requires that you divide the number of rooms used for your business by the total number of rooms in the house. Keep in mind all rooms must be roughly the same size.
Here are a few more tax deductions you can obtain:
- Rent or mortgage interest. As a renter, you can deduct part of your rent. If you are a home owner, you can deduct a portion of your real estate taxes and qualified mortgage interest (but not principal) payments on your home.
- Utilities. You can deduct the business percentage of payments you make for utilities and general home services.
- Repairs and decorating. Costs that you incur for the benefit of your business are considered "direct" home office expenses and are fully tax deductible. For example, if you repair wood paneling in your office, this expense can be a tax deduction. You can also deduct some "indirect" home office expenses, such as repairing a leaky roof. But if these modifications benefit only the personal-use part of your home, they are not tax deductible.
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