Tax Time Tips Pt. 2

Following are the top five deductions that small business owners fail to take on their tax returns:

1. Automobile expenses - if you use your car for business, you can deduct a portion of your car expenses. You can either keep track of and deduct your (business related) actual expenses, or you can keep track of your business miles and use the standard mileage rate (48.5 cents per mile in 2007).

2. Startup expenses - business expenses incurred before you actually start the business used to have to be depreciated over 5 years. Starting after October 22, 2004, you can now deduct up to $5,000 of startup expenses in the first year of business. Startup expenses over $5,000 still have to be depreciated (over 15 years). Startup expenses include advertising, hiring employees, purchasing equipment, supplies and more.

3. Education expenses - you can deduct the cost of classes, seminars and other education costs if they are related to your current business.

4. Travel - when you travel for business, you can deduct the cost of the airfare, taxis, hotel, meals, and other travel related expenses. If part of your trip is for personal reasons, you may need to prorate part of the expenses. Also, if you bring your family along, only your own expenses are deductible.

5. Home office expense - many people choose not to take this deduction because it is considered a red flag. If you have a legitimate home office, then you should not miss out on this deduction just because someone says it could be a red flag (being self employed is a red flag, but you wouldn’t not go into business because someone says you’re more likely to get audited as a small business owner, would you?). Home office expenses include mortgage interest, real estate taxes, home owners insurance, utilities, and security alarm. You can only deduct the portion that represents your home office, but this can be a substantial deduction for many home based business owners.

Tax Time Tips

Here are some tax time tips from Kristine.

Many people wonder if they are required to report the profits they earn online. The short answer is “yes”.

If you do business online, whether it’s selling on eBay, affiliate marketing, selling a service, or direct selling, it’s taxable income. This is true even if you think you just have a hobby.

Generally, any income you receive from all sources is subject to U.S. income tax unless it is specifically exempt by law (hint: online profits are not exempt by law). That means that a lot of activities that you might not think of as taxable, such as garage sale income, gambling winnings, and online businesses are taxable.

You must file a tax return if your net earnings from self employment are $400 or more. You are self employed if you carry on a trade or business for profit. If you are selling on eBay with the intent of making a profit, then you are self employed.

To report your earnings, you should file Form 1040, and attach Schedule C or C-EZ. Schedule C is used to calculate your net profit or loss from your business, which is then reported on your Form 1040.

At this point, you may be thinking “I don’t run a business; I just have a hobby”. Unfortunately, income from hobbies is taxable as well. Even worse, you can only deduct expenses up to your hobby income, which means losses are not deductible.

There are several tax advantages to doing business online. Personal expenses, such as the use of your car, home or computer may become partially deductible, retirement savings plans can shelter part of your eBay income from taxes, and you may be able to hire your family to help shift income to members in a lower tax bracket. So even if you only earn a little money online, not only are you required to report your earnings, it may even help you reduce your income taxes by taking advantage of tax opportunities available only to small business owners.

Finally, there is a common misconception that if you did not receive a 1099 or W-2, you are not required to report your income. This is not true. All income is reportable, regardless of whether you receive a form or not.

Wonderful Wacky Wednesday

How many of you have your taxes done?  I go to the preparer next week.  So far I have cancelled with my tax preparer 3 times.  I suppose I will make it in this time unless the kids come down sick.  That is what happened the last 3 times. =)

It really isn’t difficult to get the tax “stuff” around, but it is tedious calculating all of the receipts and knowing what you can deduct and what you cannot deducted.  I have a  decent idea of what you can and cannot deduct.

Way back when I took the H&R tax preparation course. After I took the course I was hired by H&R Block to do taxes for people.

Oh my! What a huge eye opener.   I was sweating bullets the whole time I worked there.  I am surprised I wasn’t severely dehydrated from that whole experience.    See, I am not a type A personality person.  I stay hidden behind the scenes. Having to ask sometimes too personal questions and do up their taxes right in front of the customer about did me in. 

Thankfully I could only handle the simpler tax forms.  I would have to take other courses to work on the harder stuff.  So after about 1 ½ months the manager pulled me to the back room where she politely let me go.   I was whooping for joy.   It felt like the world was lifted off my shoulders.

Even though the whole experience took me out of my comfort zone, I am greatful I did it.  It really forced me into being more outgoing.

I learned quite a bundle of interesting tax saving tips.  The one tip I took home with me was the whole idea I could hire my kids for my business.  When I went to the tax preparer last year she said the same thing to me.  I figured well what could it hurt.  My oldest daughter, Oksana, and I have a blast working together. She is only 9 and she knows how to pour candles, molds and creates mold designs.   Oksana also requests a snack or TV break every ½ hr.

If you are interested in learning a bit more about hiring your kids, here is a wonderful book on the subject.

Kristine is the owner of Ebiz Tax Tips and is top notch in her field. Here is another great ebook by her that covers all you online tax questions.