If it’s one thing home-based businesses face as a sort of negative, it’s the taxes. It’s not that they’re necessarily heavier than in a corporation, so to speak — but the expenses, the deductions, the costs of certain business needs typically arising from a home-based company, which honestly can be considered a 1099 to a certain degree — let’s just say they can all add up to be a bit of a mess.
It takes sheer strategy to manage the taxes. There’s no question about it. Luckily, we’ve got the secrets here — seven of them to be exact, starting with….
Be Unabashedly Anal About Organization
You might drive a ton of people crazy — but believe me, it’s worth it, if you’re an entrepreneur in charge of your finances and taxes. This is ultimately how taxes get managed aside from hiring that experienced tax consultant. Get organized.
What do you do with receipts? Save all of them. If you can scan them, do it. That saves your paper products. When you get numerical about all of this, understand that a simple $200 business expense receipt may give you a deduction worth around $100 on your taxes. That’s all because you saved that piece of paper called an “invoice” for your business.
Oftentimes, though, you can’t conceivably scan each receipt. This is what you do: save all of them in a shoebox. I’m definitely not joking. If you don’t have a shoebox, get a simple envelope and keep it in a briefcase, backpack or any type of safe bag to keep all those papers securely. Over time, if that envelope gets so incredibly full, it’d be prudent to then scan all of them and get them online. Software like Shoeboxed.com and Capturengo can do the trick.
You Still Have to Get Mathematical, Though
That’s a given, obviously, but under more particulars, we need to focus on actual startup costs for a business. Why? No one considers these expenses as part of taxes. That’s a big mistake. Believe it or not, you can in fact write off your capital expenses — which count for your costs just to launch your business right from the get-go — totalling as much as $10K since 2010. You deduct that amount on the first year of business and then consequent equal remainders over the next 15-year period.
There’s a catch, though; you need to actually lose money for you to make that deduction. That may not be such a difficult task as most startups go through a lot of their capital just to successfully launch without any percentage of profit. Just in case, though, you seem to be doing particularly well, if you really want that deduction, pace yourself and let your capital coast you through until tax time comes around. You then immediately get that deduction back.
Do You Actually Operate in a Home Office?
That’s good. You can get a deduction solely based on that as well. Professionals were actually quite timid about ever reporting that as a deduction due to constant red flags, but thankfully the government has lightened up on that for sake of the entrepreneurial spirit. There are specific criteria, though, to writing off the expenses to your home office, such as using your space specifically for administrative and management activity. If you’re constantly picking up the phone, talking to customers, at home, you may definitely qualify. Moreover, you must have no other fixed location, such as another actual office you might operate out of, for you to claim this deduction.
You get a “business use percentage” off of the common costs you’d normally have to pay at home, such as….
- Mortgage Interest
- Rent Payments
- Property Taxes
- Utility Bills
- Repair Expenses
- Insurance Premiums
- Garbage Pickup
When you think about it, this makes living at home a lot less expensive. We don’t even need to address the fact that you’re automatically covered on the bills where you work as well as reside.
Deducting Health Insurance Costs
This is, yet, another benefit unique to home-based businesses: health insurance can be deducted. Be cautious, though, as the tax benefit only applies to those without any secondary business and full-time job.
You have to solely work at home. Even if your spouse has a job with some sort of employer-subsidized health plan, you can still be disqualified from the tax credit regardless of your professional situation.
Count Your Miles
Oddly enough, this may sound ridiculous, but when you think about it on a grand scale, it should make sense — the distance you travel just to do your work entitles you to an actual deduction as well. You could be in a car, truck or even plane. If you have to get from A to B, and it takes quite a bit of petrol or expense to do it, those miles matter.
Bear in mind, though, that it’s an allowance not necessarily measured by how many miles you travel unless you specifically count every single mile you travel. If it ends up adding up to more than the standard allowance, guess what — you’ve saved more tax money.
Be sure, though, to only monitor every expense with a newer car. An older car, since that’s a vehicle often used for personal reasons as well, will only allow a portion of that deduction. You therefore would use the standard allowance as you could potentially save less money if you track all the expenses.
Of Course, You Can Pay “Yourself”
Yes, that does sound like a no-brainer, but without a doubt the best business lawyer in the industry won’t discount this dynamic piece of corporate wisdom. Yes, you’re making money; that’s obvious. But you also have to pay yourself in the long-term through an IRA or some other retirement fund. Think of it as your own selfmade 401k with the obvious bonus that it’s pre-tax money.
Lastly…. Hire Your Family!
Listen…. You’re not simply being nice here. Did you know you can even deduct wages as a business expense? Go ahead and hire a spouse, or even your son or daughter. That worker can actually earn up to $5.7K, tax free, and you get the deduction for it.
It Definitely Seems as if You Have Possibilities
It’s a bit more legwork, but overall your taxes get streamlined, you get a better refund, and you most assuredly feel even more accomplished about your work. Above all else, the most important tip encompassing all of these is to start now. Plan ahead for the next year. It’s crucial to ensure that your most accurate refund ends up in your hands after all the hard work you’ve achieved for yourself.
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Matt Faustman is the CEO at UpCounsel. You can follow his business insights on Twitter at @upcounsel.