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Are YOU Leaving Money on the Table?
Are YOU Leaving Money on the Table?
© 2002 Elena Fawkner
For those of us in the U.S., tax time is here again. For those of you elsewhere, tax time is always around the corner. Oh joy, I hear you say. Well, if you're contemplating an online home-based business, it may be just that. Really. Here's how.
Are you ready to start making money with, say, affiliate programs or by creating your own information product, but haven't really got off the ground yet because you're stuck in the stage of thinking you have to learn everything there is to learn about internet marketing before you can start? (Which you don't, but that's a whole other article.) How much money have you spent on e-books and other information products in your quest for the holy grail? How much money are you spending on your ISP every month? How much money have you spent on what appeared to be promising online business programs only to see them bite the dust? And what about ALL that software you've bought but never used?
Well, even if you haven't made a dime yet, if you have a "genuine profit motive", start thinking outside the paradigm of the *would-be* online business owner and start thinking from the perspective of one who is *already* in business.
What does that have to do with tax? Everything.
If you have a *genuine* profit motive for what you're doing, then you're in business. If you're in business, you can deduct business-related expenses against business and (if you're a sole proprietor), personal, income. Including ISP fees, including information products, including "secret marketing site" membership fees. All of it.
See where I'm going with this?
Even fees for what turn out to be bogus programs can be deducted if you incurred them in pursuit of business profit. And while we're on the subject of being hoodwinked, let's just get that one out of the way right here. We're ALL suckered into falling for at *least* one - it's called the school of hard knocks - so don't dud yourself out of a righteous deduction just because you're feeling ever so slightly foolish for having been suckered, against your usually MUCH better judgment, into believing that what sounded too good to be true wasn't. Even though it was. Repeat after me - a deduction is a deduction is a deduction. All that's required is that you incurred the expense with the motivation to make a profit.
Now, a word of caution here. You can't deduct expenses incurred in pursuit of illegal activities so I wouldn't try and claim an investment in a pyramid or ponzi scheme on your tax return. But if all you did was fall for a sales pitch for a program that, if successful, would not have been illegal, and it was a business-related expense, go for it. So long as you had a genuine profit motive when you handed over the dough.
It gets even better. (By the way, this is all U.S. stuff we're talking here. Check your local tax laws. Many countries will have something similar to what I'm about to talk about.)
Here's where it gets interesting. If you work your business out of your home, in a room or a part of a room that you use *exclusively* and *regularly* for your business AND that area is also your principal place of business, you may qualify for the home office deduction. Even if you also work at a job outside the home.
And when I say "exclusively" I MEAN exclusively - no children using your computer for their homework or to play computer games, no personal papers in your work desk, no late-night chatrooms (or less savory online pursuits if you get my drift), no online affairs, no television in the room.
You may not be able to apply the home-office deduction against *this* year's income (as we'll see in a minute) but you will be able to apply it against profits generated in future years.
So, why all the emphasis on "genuine profit motive"? The movement towards easily-started online businesses has sprouted an industry of so-called tax experts who would have you believe that anyone can reap the benefits of home business tax breaks simply by starting a "home based business". They basically try and convince you that anyone can pretend to be running a home-based business and thus qualify. Not so. You need to be running a real business, not engaging in a hobby or a sham. What distinguishes a real business from a mere hobby? You guessed it - a profit motive.
Believe me when I tell you, if you're planning on taking business deductions, you'd better be able to prove to the IRS that you
have a genuine profit motive. How do you do that? By keeping proper books and records. By keeping business and personal expenses separate. By keeping business and personal income separate. By running a genuine business, in other words.
Here's how it works.
Let's say you have a spare room in your house that you use exclusively as a home office. Over the past 12 months, you've bought a computer, desk, chair, printer and fax machine. You've decided that you want to start a home- based online business on the side while you continue to work in your job. You spend several hours a day researching ideas for your new business and you spend a small fortune on your high-speed internet connection, and various information products relevant to your area of interest.
Because you're running a business, one of the first things you're going to want to do is get a system for your business records set up.
Keep a record of all expenses as they're incurred so that when tax time comes around, everything is at your fingertips. I use Excel spreadsheets for this - one spreadsheet for every expense category. Here are the categories I use (use whatever categories make sense for your business though):
Advertising and promotion Software* Web Hosting and Domain Name Registration Fees ISP/Cable Modem Fees Office Expenses Content Subscription Fees Telephone*** Bank Charges Books and Magazines Equipment** Furniture** Bad Debts Home Office Deduction
* Usually has to be depreciated over several years unless it's software that needs to be updated frequently such as anti-virus software.
** You can either depreciate these items over time or you can write off 100% during the year of acquisition up to a maximum of around $20,000.
*** If you only have one phone, you'll need to apportion expenses between personal and business. On the other hand, if you have a second line exclusively for you business, you can write off 100% of expenses for the second line.
Every time I pay a business expense, I enter the details in the appropriate spreadsheet. Very easy.
Then, when the time comes to file your tax return, you just need to prepare a Schedule C (for individual taxpayers). If your business makes a loss (i.e., the expenses you pay out are more than the revenue you bring in from your business), that loss is deducted from your income from all sources, thereby reducing your taxes.
But, best of all, if you qualify for the home office deduction, you can take a proportionate share of your mortgage or rent payments and your utilities and apply them as a deduction against your business profits, but only to the point where the profit from your business equals zero. In other words, the home office deduction cannot be used to create a loss situation. But even if you can't deduct it this year (because your business has already made a loss), it's not lost. You can carry it forward to future years to be applied against future profits.
So, as you can see, even if you're only in the information- gathering/learning stage of your business, if you have a profit motive you're nonetheless in business and you can and should be writing off your business expenses even if you're yet to start generating revenues.
Make sure you keep proper records and substantiate all expenses though. The IRS is, of course, well aware of the potential for abuse of home business tax deductions and will be paying close attention. That's fine though. If you have a profit motive, you ARE running a business and you're *entitled* to take any legitimate deductions that are available to you. To do anything less is to leave money on the table.
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** Reprinting of this article is welcome! ** This article may be freely reproduced provided that: (1) you include the following resource box; and (2) you only mail to a 100% opt-in list.
Here's the resource box to use if reprinting this article:
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Elena Fawkner is editor of A Home-Based Business Online ... practical business ideas, opportunities and solutions for the work-from-home entrepreneur. http://www.ahbbo.com Also, visit Elena's newest site, Web Work From Home http://www.web-work-from-home.com
About the Author
Elena Fawkner is editor of A Home-Based Business Online ... practical business ideas, opportunities and solutions for the work-from-home entrepreneur. http://www.ahbbo.com Also, visit Elena's newest site, Web Work From Home http://www.web-work-from-home.com
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