Today I’ll be sharing some home based business tax benefits and showing people how to qualify for the tax breaks that they don’t know about that can save them a lot of money.
I’ll also show you how much you can save by starting a home base business if you don’t currently have one. You can learn the tax deductions, how to understand what you qualify for and how to keep the right records from the very beginning,
We’re going to talk about what people need to do to start getting $3,000 to $6,000 back on their taxes, so that will cover the cost of starting and running a home-based business. There is really only a few simple steps.
Home Based Business Tax Benefits
The first one that is critical is to actually start a home-based business. These are home business tax deductions, so without a home-based business they don’t qualify.
Once you’ve got a home-based business, then you need to work your business on a regular consistent basis, at least three to four hours a week, that’s not a lot of time.
Number three is: You need to have a profit intent, which means working the business toward making a profit.
What’s crucial about that is it means a person can start qualifying for the home business tax breaks the day they come into a business.
So as soon as you express a profit intent you qualify. You don’t need to wait until you’re profitable, which may only be a few weeks later, or whenever it is.
The last step is to keep good records. You simply have to have good records to defend your deductions in the event of an unlikely audit.
Let’s talk about the special home based business tax deductions because they create the refunds that allow people to increase their paycheck.
Home Based Business Tax Benefits – Tax Deductions
There are a lot of tax deductions available to home based businesses. What are the biggest ones? They’re actually about a hundred that are available to home-based business owners.
You don’t need to know all of them but if you understand just six, that alone will put enough cash in your pocket to get to the $3,000 to $6,000 dollars that most people can get with a home-based business.
Let’s talk about what those 6 are, in no particular order.
Home Office Deduction
The first one I want to mention is sometimes called the home office deduction. I want to mention this first because there’s so much misinformation about it.
There are tax pros who used to tell their tax clients don’t take this deduction. It’s risky and it’ll increase your chances of an audit, and they were right. But Congress has plugged every single hole with that tax deduction.
This offers you a chance to be able to make your money go further, because when you’re paying your mortgage or rent, a portion of that can be tax deductible as a business expense.
Same thing with utilities, repairs and maintenance. A portion of all those things can be tax deductible as a business expense but only if you use the business use of the home deduction.
Now the other thing this particularly deduction does is it makes it clear that you have a business based in your home, so it helps you get to step 2 in the event of an audit and that’s the ability to prove you have a legitimate business.
The second one I’d like to mention is business use of your personal vehicles because that tends to be one of the biggest, if not the biggest tax deduction category for home-based business owners.
Most people when they really understand the ins and outs of how this works, most people can write off 70 – 80 percent, sometimes even more of all the miles they put on their car as business miles.
Now, what’s that means is the business tax deduction rate, which is 55 and a half cents a mile. Multiply that by say 8,000 miles and all of a sudden you got a 4 to 5 thousand dollar tax deduction.
This is huge and all you’ve got to do is keep track of is the date, where you’re, why you’re going there and how many miles you’re traveling, and you only have to do it for 90 days when you really understand how the rules work.
Hiring Your Kids
Another one would be hiring your kids. I love this deduction because most people don’t know about it. The courts have ruled a child as young as the age of six can be hired by their parents home based business.
When you pay your children in a home based business the money you pay them is tax deductable to you as wages.
Because they’re part time employees, the money they earn from you though is tax-free income because minors don’t have to pay taxes on their income up to $5,700 a year.
So it’s tax-free to you, it’s tax-deductible. This is the only way I know of where you get taxed free money. This is beautiful because it’s the kids working in the family environment. I could talk for an hour about the values of just hiring your kids.
Out-of-Pocket Health Care Expenses
The next one that comes to mind would be out-of-pocket health care expenses. Your premiums, co-pays and deductibles, all those things that aren’t covered.
Sometimes alternative therapies like acupuncture, chiropractic or nutritional supplements are something often not covered under your health insurance plan.
Well, with a home-based business it’s the only way that you can get a hundred percent deduction for all of those. The way this works, the short version is that you hire your spouse to work in your business.
As an employee she can work as little two hours a week to qualify and as an employer you give employees benefits. You give her an employee benefit called a medical reimbursement plan.
Which says as long as you’re working for me, I’ll reimburse you for all out-of-pocket health care expenses that you incur whether they’re incurred by you or any member of your immediate family, which includes you and the kids.
This means she just made every penny of your out-of-pocket health care expenses, cash deductable as a business expense!
Number Five would be business travel. Everybody knows of the business travel deductible but what happens if you go a day or two early or stay a day or two late to visit family or friends or sightsee?
What if you bring your family members with you on the trip, combining business with pleasure? What happens then? Well, that was fuzzy for a long time but now the IRS has been forced by Congress to make those rules crystal clear.
Now it’s possible for you to plan your trip before you leave on it. If you plan it correctly, you can write off the vast majority, if not all, of your of your trip as a business expense.
Even if that trip would have been a vacation, you can plan it in advance in a way that qualifies as a business trip legally under the under the new tax system.
The last example is business entertainment. Now the two things I want to mention about this one is there are two types of entertainment expenses you can write off.
One is called business discussions and the other is called associated entertainment, which is entertainment associated with the business meeting but it’s not part of it.
An example would be that you and I play tennis in the morning. Then we have a business discussion over lunch at noon.
The tennis would be associated entertainment. The business discussion over lunch would be the business meeting.
Well, it used to be that the associate entertainment had to take place immediately before or after the the business discussion to qualify for now its anytime during the same 24-hour day, so that’s gotten a little looser.
The other thing that has changed about business entertainment is that meals, meal type entertainment, taking somebody out to dinner.
If you took me to a restaurant for dinner since the 70s, that’s only been deductible 50%, but there are now three ways in which you can write off a hundred percent of it.
One example is invite me into your home. Instead of going to a restaurant bring me to your home where 100% of the the food and beverage that that you buy for that entertainment becomes deductible.
So the rules have changed and when they change they got clearer and clearer. Now, when tax rules are clear, you don’t have to worry about tax audits because you know clear rules are easy to follow.
If you know the law you don’t have to be afraid of the law. I know a lot of people think of taxes and record-keeping as painstaking but it’s possible to do it in five minutes a day.
Home Based Business Tax Benefits – Conclusion
The law requires good documentation to protect your tax deductions but the law does not require that documentation to be difficult.
I can show people a system how to keep IRS compliant, audit proof, penalty proof records in about the same amount of time you spend brushing your teeth every day.
I mean it’s really simple because there is great, easy to use, user-friendly software for those people who, when they hear the word record-keeping their eyes glaze over.
We found a way to do it painlessly and in a couple of minutes a day. It’s not difficult and it’s critically important to keep your records right.
I get asked a lot by stay-at-home moms and stay-at-home dads that often feel they can’t take advantage of these tax deductions because they don’t actually receive a paycheck from any given company yet.
That’s great question and the answer is the tax deduction generated by the home-based business can be applied against any source of income for the family.
That includes the other spouses w2 income as well as any other income like investment income, for example, a rental rental property income.
So those deductions can be used for any source of income, not just the income from home based business itself. So any family can really take advantage of these home-based business tax savings.
I hope this post has helped you realize the importance of home based business tax benefits and you put them to use. If you have found this helpful leave a comment below and be sure to share with your friends.