Steps to proper tax planning for a home-based business

Written By Steps To Faculty Published October 14th, 2010

Starting your own business takes lots of forecasting and a lot of planning. Between sales forecasts, economic outlook predictions, maintaining an edgy website, and improving customer service relations, tax planning may be the furthest issue in your mind. However, according to Small Business Magazine, home business entrepreneurs often fail because they lack proper tax planning at the inception of their businesses. Tax planning is not hard to do, but can save you a great deal of money and determines how you establish your business. Take a look.

Step 1 Take a home business deduction

To date, you can deduct part or all of your home as a deduction if you a portion a section strictly for your home based business. This deduction allows you to write off maintenance and operational costs for your home based business. This includes items such as mortgage, lease, or rent for your business depending upon its location-house or apartment. You can also include security, waste removal, heat, utilities, and even a portion of your phone bill. To be eligible though, you must have a portion of your dwelling strictly used for your home based business. This section is only used to conduct your business and is your principal place of business.

Step 2 Write of ordinary expenses

Ordinary expenses are also allowed to be deducted for home based business. These expenses include supplies, business travel, shipping and delivery expenses, retirement accounts, and equipment. Be sure to be able to show how each of these expenses are strictly for your business.

Step 3 Track expenses

You should be able to delineate your personal expenses from your home based business expenses. Keep a separate phone line in your home based business to separate your personal phone bill from your business phone number. In like manner, have a separate bill for your Internet provider that provides access to your home based business different from your regular dwelling. Be sure to keep personal expenses different from that of your home based business.

Step 4 Explain yourself

The Internal Revenue Service has seen a rise in the number of home based business in the past two years given the sour economy and lack of employment opportunities. However, the IRS has also increased the number of audits on home based businesses in the past year alone by 45%. Why? Because home based business owners hit upon some unclear boundaries when it comes to keeping proper documentation for their businesses. Visit irs.gov to ensure you understand the current tax laws that apply to home based business. The best action to take is to keep good documentation of Internet usage related to your business, telephone and utility bills that are specific to your business in the event you are audited.

Step 5 Keep a trail

Keep a detailed listing of all receipts, inventory levels, and customer and supplier information. Be sure to include such minutiae as total for an invoice bill and how much your customer paid, expense category, running amount of account receivables and by whom, all accounts payables and to whom the payables are for, and all necessary dates.

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