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Tax planning for a home-based
business
Dear Small Biz Adviser:
I have enough money to start a home-based business, but want to
know what deductions I can take. I recently purchased a laptop,
another cellular plan, Internet service, an additional telephone
line, a vehicle to meet with clients and other items essential to
a startup. Can all of these items be claimed? Would this be on
a percentage basis or a total deduction? I just want to get a general
idea of what I can claim next year at tax time.
Jan
Dear Jan:
You are doing very well to plan the startup of your business. In
addition to your recent office preparations, I assume you are researching
your markets and, in turn, deciding the operational needs and associated
investment required to handle the anticipated market.
The nature of your inquiry indicates you also are
doing your financial homework, including the financial projections
that evolve from that planning.
As for your specific tax question, you want to consider
two distinct categories of expenses:
- Operating expenses: those costs associated
with the operation of the business venture, regardless of whether
or not sales are being generated.
- Home office expenses: most, if not all,
are associated with operating expenses, including many that home-office
entrepreneurs often overlook.
Another category of expenses includes those line items
directly associated with the cost of sales, but we leave those for
another column.
Operating expenses
Let us first consider your operating expenses. These line items
are rather common to many business operations. They generally include
office supplies, wages, salaries, benefits, advertising, association
and chamber membership fees, magazine and other subscriptions, and
the items listed in your inquiry. The new economy produces costs
for Internet access, computer maintenance, upgrades, cell phones
and the like that are now found on income and cash-flow statements.
However, allow me to comment on a couple of your expense
items:
1. Automotive expenses: These need to be
carefully noted, including mileage, reason for use of the vehicle,
gasoline receipts and more. These substantiating receipts and
notations are even more imperative if the vehicle is used for
personal as well as business use. Purchase a ledger book that
allows a sufficient number of columns in which to itemize the
various automotive expenses. It becomes a permanent record for
your income taxes.
2. Telecommunications: Your second phone line
and cell phone that are specifically for the business. If there
are any children in the house, you want to keep them away from
both phones. Likewise, you do not want the kids or other family
members using those phones for personal calls. Exclusive business
use means all expenses on the itemized bills are directed to the
business and deductions from gross profit before taxable income.
Home-office rules
Now let's turn our attention to the home-office side of deductible
expenses. Definitely set aside a specific area of your home for
business use only. Ideally, you want to designate a walled-in room.
Otherwise, partition that portion of the room that will be used
for business use only. If clients visit you at home, conduct that
activity in the office.
In the case of a partitioned office, I strongly suggest
the office space be sufficient to allow for the seating of and attendance
to visiting clients. The only alternative would be dealing with
clients in a dining room, den or some other acceptable space. However,
do not count such shared-use space as part of your home office.
Tax rules require the area to be exclusively for business use before
it can be deducted. Once a dedicated home office is established,
then a percentage of expenses associated with your mortgage, utilities,
home improvement, and real estate taxes can potentially be deducted
from business income
For details on business and home-office expenses read
IRS
Publication 535 and Publication
587.
I wish you well.
-- Posted: April 9, 2002
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