Keeping Track of Your At-Home Business Expenses
If you are new to working at home, then you might not be aware that you can legally deduct many types of valid business expenses, such as paper supplies or the second phone line you install for your business, on your self-employment income tax return (and thereby reduce your taxable self-employment income).
This article will discuss general expenses and will not deal with how to determine and deduct expenses that relate to your in-home office space or depreciable office furnishings/equipment. Our goal is to provide you with general information and encourage you to keep accurate records and to consult with your tax professional.
Working at home and being your own boss is the lifelong dream of many people. Be proud that you have achieved what so many do not. Let me be very clear that this article is written on the assumption that you report your self-employment income---all your income---and that you pay the self-employment taxes that are due on that income.
This article is also based on tracking and recording legitimate business expenses. Even if you have very modest income and are using your kitchen table a few nights a week as your office space, there are still business expenses that you can use to help reduce your self-employment taxable income. Our goal is not to help you find ways to pad your deductions or to dodge paying your taxes.
This article is aimed at those who are either new to working at home or who need a simple explanation of a subject. It is not complicated, but it does require discipline. You don't need a complicated method of data storage in order to track your expenses. Of course, if you live for spreadsheets and bar graphs, you can get as high-tech as you like. Personally, I have a very simple Excel spreadsheet and a file folder for each quarter subdivided by individual projects.
It is important to know what qualifies as a 'business expense.' Well, that's simple. A business expense is money that you pay out of your pocket in order to maintain your at-home business. An easy example would be a business phone line. If you had a second phone line installed as your business line, then you can legally deduct 100% of the cost of that phone line as a business expense. You can also deduct the cost of equipment, installation, and hook-up (for the tax year during which you installed the line).
Business expenses do not have to be related to office equipment or furniture, or even the actual work that you do. Legitimate business expenses also include office supplies like computer paper, ink cartridges, pens, notepads, paperclips---literally anything that you buy specifically for conducting your business.
I use this rule of thumb: If I wouldn't have purchased it otherwise, then it is a business expense.
Simply put, I'm referring to things that you find that you use regularly in the course of your business. As an example, I have clients for whom I send back-up CDs containing files of work. This means that I regularly purchase CDs. Since we have a second computer (that my husband fiercely regards as 'his'), it could be argued that we might have purchased the CDs any way. Since I routinely buy CDs in large quantity, the cost of those disks is a business expense. We have a small supply of blank CDs for our personal use that is separate from my business supplies.
Once again, the rule applies: If you buy it specifically for business use and you use it during the course of doing business, then it is a business expense.
Depending on the type of at-home business you have, you may be well beyond the 'paperclips and pens' type of expenses. If you have an in-home office (used specifically for your business and nothing else), and you have expensive business equipment (let's say a high-tech copier that can handle blueprints), then your need to track business expenses and the manner in which you are going to report these on your self-employment income tax forms is a little bit more complicated and may even require having an accountant. This article does not address that situation.
At the time of this article, the IRS allows business expense deductions up to $2,500.00 without requiring you to itemize your expenses into pre-set categories. That is, you can simply report a lump sum of $1,879.32 without having to explain it. If your business expenses exceed $2,500.00, then you must file a 'long form' and categorize your expenses as specified by the IRS.
Although it is relatively easy, it does mean that you have to track your business expenses a little more closely. So, for the moment, let's just concentrate on getting you accustomed to following a few simple steps to track your business expenses.
Tracking your business expenses doesn't have to be hard or complicated. Make the system suit your style---and just remember: Pay for the item(s) separately and keep the receipt!Written by: Jan Kovarik For information about this author or more articles visit this link.
Provided courtesy of www.bestlearntoearn.com a business information website