Archive for the ‘Taxes’ Category

Part or full time, your Internet marketing business may be bringing you more opportunity for tax breaks than you realize. The IRS allows for several deductions for home based business, provided certain qualifications are met. These deductions are found in the areas of home maintenance and repairs, office equipment, Internet and website expenses, mortgage interest or rent, insurance and many more.

According to Keith Hall, tax advisor to the National Association for the Self-Employed www.NASE.org, the most overlooked deduction by small businesses (that would include Internet marketers) is the home office deduction.

Since a business only has to pay taxes on their profits, listing home business expenses can make a huge difference in one’s taxes. Many, but not all, of these deductions are related to the home business space.

Home Business Space

In order to deduct expenses related to your home office, the space you use must meet two criteria: it must be used regularly and exclusively for business, not personal use.

For example, if you have a computer set up in the den that you use for working on your Internet business (whether affiliates, Adsense, networking, sales, etc.), but you also have a television in the den for the children, then your office space wouldn’t meet the “exclusive use” criteria.

Regular use is less clear. Basically a part time business is fine, but you need to use the space regularly not just occasionally for that business.

Now the good news is that your business workspace does not need to be marked off by a permanent partition. For example, a dining room that opens to the living room is fine, provided you only use it for your business and you use it regularly.

Furthermore, your home business space does not need to be the only fixed location where you conduct business. For example, you could have an office in town and also a home office.

You would need to determine the part of your gross income from the business use of your home by considering the time you spend at each location, the business investment in each location, and any other relevant facts and circumstances.

Save Your Travel Receipts

If your home office qualifies as your principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. By the same token, if you travel on business, say to a conference (or Hawaii to do some research for you travel site!), be sure to save receipts for travel-related deductions such as car expenses, meals, lodging, etc.

Product Inventory

The criteria for home business space used for storing inventory or product samples are a bit different from office space. For example, your home would need to be the only fixed location of your trade or business, but you would also be able to use this space for personal use. For example, if you’re an eBay seller and you store inventory in your basement, you could also do laundry and have a family pool table in the same space.

Figuring the Amount You Can Deduct for Home

If your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation), you can deduct all your business expenses related to the use of your home. Expenses for running your entire home can be partially deducted based on the percent of the home used for your home office.

To find the business percentage, compare the size of the part of your home that you use for business to your whole house. You can use any reasonable method to determine the business percentage. The following is the most common method for figuring the percentage:

Divide the area (length multiplied by the width) used for business by the total area of your home. It may seem bigger is better for your office, but you must keep it within reason or you could set off a red flag at the IRS. The IRS website uses 20% as an example. Go much over this, and you might get audited.  

Some expenses are deductible only if you use your home for business. You can use the business percentage of these expenses to figure your total business use of the home deduction. These expenses include items such as:

- Depreciation of the home
- Home insurance
- Rent
- Repairs (with the exception of repairs that qualify as a permanent improvement, in which case they’d fall under “Depreciating your Home”) 
-  Security System
- Utilities

Business Expenses Not Dependent on Meeting Home Office Criteria

The following are expenses commonly deducted by Internet marketers:
 
- Website Design, Hosting & Maintenance Fees
- Domain name registration fees
- Internet service provider fees 
-  Consulting service fees
- Networking fees
- Independent contractors paid for website content, sales letters, emails, etc.
- Auto-responder service fees 
-  Computers and related equipment
- Phone

As with the home business, the above expenses can only be deducted for the portion used strictly for business. For example if you have only one phone line, you can’t deduct the basic phone bill, but you can deduct long distance business calls.

A note about computers – If you purchased a computer for your business, and you use it more than 50% of the time for your business, you can claim it on what is called a section 179 deductions or an accelerated depreciation deduction. If not, you might be able to depreciate it using the Alternative Depreciation System (ADS). It gets more complicated, but these are some things to bring up with your tax consultant.

Credit Card Interest

If the charges on a credit card are business related, then any interest or finance charges from them will also be a business expense. Having a card that you use only for business makes this easier.

Health Care

If you pay for your own health care, you may be able to deduct this as well. In order to qualify for the deduction, you cannot be eligible to participate in any other subsidized health plan, such as might be offered by another employer. Further, the deduction is limited to the earnings that you have from the business.

On a related note, remember to deduct your retirement plan such as an IRA. Many forget.

Hiring Your Children

Some teens are really good at computer programming, others at computer repairs and maintenance, graphics, writing, and more. Younger children often are eager to help in the office with cleaning, filing, and whatever else they can do to earn money. The standard deduction for children ages 7 to 17 is $5,000, meaning they are exempt from having to pay any taxes on the first $5,000 earned.
 
As long as your business is a sole proprietorship or partnership your kids won’t be subject to Social Security or Medicare taxes either. And you get to claim the wages paid as a business expense. Your kids can earn money for special things and save the rest in an IRA for a nice nest egg or college. It is important to pay your children with checks and to keep good records of the work performed. The pay must be the same as you would pay anyone else to perform the same tasks.

Unless your child earns 50% or more of his own living expenses, you can still claim your child as a dependent and get the child tax credit. If all these expenses exceed the deduction limit, carry the excess over to next year.

You do not have to use a particular method of recordkeeping, but you must keep records that provide the information needed to figure your deductions for the business use of your home. You should print out or store on a backup drive receipts and other evidence of all expenses you paid.

Amending Your Return

If you have filed your taxes and now see that you have missed an expense that will make a significant difference in your deductions, you can file an amended return and include the missing deductions. You would use IRS form  1040X, which you can download at www.irs.gov. See IRS Pub 587 for details.

Preparing for 2011

If you didn’t keep track last year, it’s not too late to start now. Consider the various expenses that you can deduct, and learn more about these and others at www.irs.gov. Then start keeping records and save all your receipts. You should print or store on a backup drive receipts and other evidence of expenses. Other helpful, free to use sites include: Money Central MSN, Nolo’s Small Business Tax Articles (a provider of free legal information), Turbo Tax Breaking News on Stimulus Package Tax Breaks.