How a Home-based Business Helps You Reduce Taxes Even More – Part I: Deductions

Did you know that one of the best ways to reduce your taxes is to start a business?

This is because there are a lot of tax deductions that are available to business owners that are normally not available if you are working for someone else.

Small businesses are considered as the backbone of the economy and the Congress believes that if your business flourishes, it would help the economy because more jobs will be created resulting in more people paying taxes.

Having a home-based business helps reduce the taxes of individuals who are still currently employed while operating their business at the same time. Or in some cases, it helps reduce the the combined taxes of married people when one spouse is working while the other is running the business.

The two tax benefits of a home-based business are:

• There are more tax deductions available – which will be discussed on this post
• Business Losses can help reduce your tax liabilities – Business losses can help you offset not only your current year’s tax return but also in the other tax year when you did not incur the loss. This means that you can potentially receive refunds for tax returns that you have already filed! This will be discussed in my next post.

More Tax Deductions Available

The good thing about a home based business is that you may be able to deduct expenses that you are already spending but unable to deduct because you are working for someone else.

In some cases, you may be able to deduct unreimbursed employer expenses as an employee but you can only do so if you itemize your deductions but these are subject to a lot of restrictions. For example, those expenses are subject to the 2% of the AGI (Adjusted Gross Income) floor limitations, which means that you may not fully deduct all of the expenses and in this case the you can only deduct expenses that are over the “floor” amount. The other bad thing about the itemize deduction is that if it does not exceed your standard deduction, you may not be able to deduct these expenses AT ALL.

On the other hand, business deductions are not subject to the same employee limitations. In fact, you incur business expenses using before-tax dollar money. In addition, business deductions are treated as above-the-line deductions, which reduces your AGI (Please read the post on why you should try to maximize your above-the-line deduction). This means that you can still deduct these expenses even if you do not itemize or use Schedule A.

Normally, expenses that are necessary and ordinary to the operation of your business are deductible. Examples of potential business deductions are:

• Home Office Deductions – if you meet the requirements for running a home office, you may be able to deduct the space you use for your business, a portion of your utilities, home insurance, home maintenance, and internet and telephone expenses.
• Vehicle expenses – perhaps you make trips to the supermarket to buy household items or to the club stores to buy household and office supplies. When you have a home based business, you may be able to deduct the vehicle expenses for this trip if you also purchase items for your business. Expenses such as interest payments, maintenance of the car, insurance, gasoline, parking fees, toll fees, etc are deductible as business expenses (or you can claim the standard mileage deduction to save you headaches from keeping up with the receipts)
• Meals and Entertainment expenses – when you run a business, you may be meeting a client (current or prospective) outside of your office and may incur these types of expenses. In some cases, your friend or a relative may be a client and you may be able to deduct meals and entertainment expenses if you meet the requirements to do so.
• Travel expenses – you can potentially deduct a portion of your personal (and your spouse, too) if you meet certain requirements for business travel. Generally, personal travel expenses are not deductible but if you can combine personal and business travel, you can save money in taxes since the business portion of your travel are deductible.
• Education Expenses – you may be able to deduct the cost of the seminars, continuing education, and other qualified education expenses you needed to operate your business.
• Health insurance premium expenses – if you or your spouse do not have a health insurance from your respective employer, you may be able to deduct this as well.

Next Page – How to take advantage of business losses ====>

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