5 Things Every Home-Based Business Owner Needs to Understand About Taxes
- Everyone needs a side business. Times have changed and having a good job just doesn’t cut it these days if you want to retire. Smart people almost always invest their time and money in building something else that can grow into something bigger.
The good news is that for those of you who are committed to making your endeavor successful, you could qualify for some simple tax breaks available to home-based businesses. That could easily put $1,000’s back in your pocket (enough to cover the costs of your auto-ship and/or product purchases.
Hopefully, by the time you finish reading this page you will realize that you can invest some of the taxes that are withheld from your paycheck to grow your business.
- There are Two Tax Systems: There are two tax systems in this country; one for business owners and entrepreneurs, and one for people with regular jobs. Owning your own home-based business, even if you run it part time, can be the single best financial decision you can make.
So why does the government give you these tax breaks for running your own home-based business? Simple, America is the land of opportunity. Small business is responsible for 70% of the growth of our economy. It also drives innovation.
- Do you qualify for the money? Before we go on let me ask you 3 questions.
- Did you start your business because you wanted to make additional income?
- Are you willing to work on your business for 45 minutes/day at least 4 days a week?
- Are you willing to keep a log/journal of the things you are doing to grow your business?If you answered yes to all of the above questions, then you definitely qualify for some amazing tax breaks and can join the millions of other people in the country that are taking advantage of the tax benefits of owning a home-based business.
- What is a deduction? If you already understand how deductions work then you should skip to the next section. For those of you who have never owned a business or need a little refresher lets go over the basics. A deduction does not equal cash. But, a deduction does help save you money on your taxes at the end of the year. So, a deduction has a cash value when it comes time to file your taxes.
In the United States you pay taxes on what is called your Adjusted Gross Income (AGI). This is just a fancy way of saying the money you make minus the deductions you qualify for.For example, if you make $50,000 at your job and you didn’t qualify for any deductions you would pay taxes on $50,000.
However, if you had deductions of $10,000 then you would only pay taxes on $40,000. And if you were in the 25% tax bracket (estimate used for illustration) then you would save $2,500 on your taxes.*This is a very simplified lesson on taxes using an average tax rate. For a more in-depth analysis of tax rates check out the education library on Taxbot.com.
In the example above we showed that $10,000 in deductions saved you $2,500 in taxes at the end of the year. You might be saying to yourself, “that’s true but I would have had to spend $10,000 in order to save $2,500.”
What if I told you that you were already spending the $10,000 but because you now have a home-based business, some of your current expenses can now qualify as business expenses?
Mary has a regular job and makes $50,000 a year. She received a tax refund of $1,500 last year, but that’s not the full story. You see she had already paid almost $11,500 to the IRS because of the money taken out of each paycheck. So effectively, she paid $10,000 in taxes! What if Mary could get back more than the $1,500 at the end of the year? What if she could get back closer to $10,000? Let me show you how this could be possible for Mary.
Let’s look at a few of Mary’s expenses. Each month she spends money on the following:
- Eating out with friends
- Cell phone
- Rent or mortgage payment
- Car expenses (gas, oil, wash)
As an employee, Mary generally doesn’t get any tax benefits from these expenses. However, with a home-based business a portion of these expenses may become deductible. So, even current expenses might become potential tax deductions!
Think of a deduction like the best rewards credit card you can find. If you have an expense that can be justified as a legitimate business expense, then it’s like getting 20-53% cash back.
BACK TO MARY
Mary started a business. Mary has a cell phone plan that she uses only for business that costs $100/month. If she uses it for 12 months that would cost $1,200/year. If she is in the 35% tax bracket then she will save $420 at the end of the year (35% x $1,200) in cash because she owns a business now!
Just wait until you see what she gets back for these other “expenses.”
Now you don’t need to go buy a new cell phone for business. You can just use your current phone and figure out what percentage you use it for business and deduct the percentage you use it from your taxes.
Remember that we told you that Mary had paid $11,500 in taxes and received $1,500 back in a refund? Well in the example above with the cell phone she would have received an extra $420 on her refund. We have put together a free book (just pay shipping and handling) that will help you find easy to claim tax deductions for your home based business. Go to taxbot.com/book to claim your copy now.
- Guilty until proven Innocent: When it comes to taxes, you are guilty until proven innocent. I know it sounds backwards right? The government acts kind of like an investor would. They give you these incredible money-saving tax breaks but they want you to be able to “look at the books” and verify that you are using them properly for the growth of your business and that you are not trying to abuse the system.
At any time the IRS can audit you and ask you to defend your deductions. And they can do it for up to the previous 3 years. They can also add an additional 3 years if they find substantial mistakes in the first 3 years. The IRS creates the rules and we have to follow them. Many business owners don’t know that there is a certain set of rules on how you have to prove your deductions. Here are a few little known facts:
- Most accounting software is great for telling you how much money you made but won’t hold up in an audit.
- Vehicle deductions are the #1 audited category for small businesses. Why? Because virtually all business owners are doing it wrong, so it’s easily found money for the IRS. Did you know you need to keep a mileage log for all your business mileage? You should be keeping a record of the beginning and ending addresses, the business purpose for the trip, and the date.
- You are responsible for proving your deductions. Most people think their accountant is responsible.
- Most people think their accountant does their taxes. The truth is your accountant FILES your taxes but they are only as good as the information you give him/her. In most cases the accountant is so busy during tax season that they don’t have time to sit down and educate you on different strategies or deductions you could be taking. I recommend everyone use an accountant but it’s a partnership. You need to be educated about general tax strategies so you can discuss them with your accountant.
Taxbot was created to help small business owners to make their lives easier and to pay less in taxes. Taxbot is a mobile app that can help you find incredible tax savings. Our average client last year logged nearly $23,000 in deductions saving them an estimated $10,000 on their taxes. Here are just a few things Taxbot can do:
- Automatically track your business mileage. That’s right! Your phone will track all your trips so you don’t have to remember. Then you can come back to the app later and classify your trips as business or personal. Easy, right?
- Digitally store receipts. Taxbot lets you snap a picture of your receipts and then asks you for additional information needed to stay IRS compliant. For example, did you know a business meal requires you document who you met with, what you talked about and why it was business, where you met, how much you spent? Taxbot makes it easy and simple.
- Link your online banking and import transactions into Taxbot using our bank level security banking connections.
- Produce our AuditSafe™ Reports at the end of the year. We guarantee that they will be the best reports your tax preparer has ever seen.
- And finally, we are going to educate you through webinars, blog articles, and more about easy-to-implement tax strategies for your business.
Sound interesting to you? We have a special offer for you to try Taxbot for 2 weeks free with no obligation and no credit card required. Just click here to learn more and to sign up.
Sandy Botkin, Attorney and Certified Public Accountant is the Chief Executive Officer and Principal Lecturer of the Tax Reduction Institute based in the Washington, DC area.
Over the past 20+ years, Sandy has taught thousands of taxpayers how to save millions on their taxes with his seminar. He consistently earns rave reviews for his clear and humorous presentations.
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