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Are_YOU_Leaving_Money_on_the_Table
| Are YOU Leaving Money on the Table?
Are YOU Leaving Money on the Table?
© 2002 Elena Fawkner
For those of us in the U.S., tax time is here again. For those
of you elsewhere, tax time is always around the corner. Oh joy,
I hear you say. Well, if you're contemplating an online
home-based business, it may be just that. Really. Here's how.
Are you ready to start making money with, say, affiliate
programs or by creating your own information product, but
haven't really got off the ground yet because you're stuck in
the stage of thinking you have to learn everything there is to
learn about internet marketing before you can start? (Which you
don't, but that's a whole other article.) How much money have
you spent on e-books and other information products in your
quest for the holy grail? How much money are you spending on
your ISP every month? How much money have you spent on what
appeared to be promising online business programs only to see
them bite the dust? And what about ALL that software you've
bought but never used?
Well, even if you haven't made a dime yet, if you have a
"genuine profit motive", start thinking outside the paradigm of
the *would-be* online business owner and start thinking from the
perspective of one who is *already* in business.
What does that have to do with tax? Everything.
If you have a *genuine* profit motive for what you're doing,
then you're in business. If you're in business, you can deduct
business-related expenses against business and (if you're a sole
proprietor), personal, income. Including ISP fees, including
information products, including "secret marketing site"
membership fees. All of it.
See where I'm going with this?
Even fees for what turn out to be bogus programs can be deducted
if you incurred them in pursuit of business profit. And while
we're on the subject of being hoodwinked, let's just get that
one out of the way right here. We're ALL suckered into falling
for at *least* one - it's called the school of hard knocks - so
don't dud yourself out of a righteous deduction just because
you're feeling ever so slightly foolish for having been
suckered, against your usually MUCH better judgment, into
believing that what sounded too good to be true wasn't. Even
though it was. Repeat after me - a deduction is a deduction is a
deduction. All that's required is that you incurred the expense
with the motivation to make a profit.
Now, a word of caution here. You can't deduct expenses incurred
in pursuit of illegal activities so I wouldn't try and claim an
investment in a pyramid or ponzi scheme on your tax return. But
if all you did was fall for a sales pitch for a program that, if
successful, would not have been illegal, and it was a
business-related expense, go for it. So long as you had a
genuine profit motive when you handed over the dough.
It gets even better. (By the way, this is all U.S. stuff we're
talking here. Check your local tax laws. Many countries will
have something similar to what I'm about to talk about.)
Here's where it gets interesting. If you work your business out
of your home, in a room or a part of a room that you use
*exclusively* and *regularly* for your business AND that area is
also your principal place of business, you may qualify for the
home office deduction. Even if you also work at a job outside
the home.
And when I say "exclusively" I MEAN exclusively - no children
using your computer for their homework or to play computer
games, no personal papers in your work desk, no late-night
chatrooms (or less savory online pursuits if you get my drift),
no online affairs, no television in the room.
You may not be able to apply the home-office deduction against
*this* year's income (as we'll see in a minute) but you will be
able to apply it against profits generated in future years.
So, why all the emphasis on "genuine profit motive"? The
movement towards easily-started online businesses has sprouted
an industry of so-called tax experts who would have you believe
that anyone can reap the benefits of home business tax breaks
simply by starting a "home based business". They basically try
and convince you that anyone can pretend to be running a
home-based business and thus qualify. Not so. You need to be
running a real business, not engaging in a hobby or a sham. What
distinguishes a real business from a mere hobby? You guessed it
- a profit motive.
Believe me when I tell you, if you're planning on taking
business deductions, you'd better be able to prove to the IRS
that you have a genuine profit motive. How do you do that? By
keeping proper books and records. By keeping business and
personal expenses separate. By keeping business and personal
income separate. By running a genuine business, in other words.
Here's how it works.
Let's say you have a spare room in your house that you use
exclusively as a home office. Over the past 12 months, you've
bought a computer, desk, chair, printer and fax machine. You've
decided that you want to start a home- based online business on
the side while you continue to work in your job. You spend
several hours a day researching ideas for your new business and
you spend a small fortune on your high-speed internet
connection, and various information products relevant to your
area of interest.
Because you're running a business, one of the first things
you're going to want to do is get a system for your business
records set up.
Keep a record of all expenses as they're incurred so that when
tax time comes around, everything is at your fingertips. I use
Excel spreadsheets for this - one spreadsheet for every expense
category. Here are the categories I use (use whatever categories
make sense for your business though):
Advertising and promotion Software* Web Hosting and Domain Name
Registration Fees ISP/Cable Modem Fees Office Expenses Content
Subscription Fees Telephone*** Bank Charges Books and Magazines
Equipment** Furniture** Bad Debts Home Office Deduction
* Usually has to be depreciated over several years unless it's
software that needs to be updated frequently such as anti-virus
software.
** You can either depreciate these items over time or you can
write off 100% during the year of acquisition up to a maximum of
around $20,000.
*** If you only have one phone, you'll need to apportion
expenses between personal and business. On the other hand, if
you have a second line exclusively for you business, you can
write off 100% of expenses for the second line.
Every time I pay a business expense, I enter the details in the
appropriate spreadsheet. Very easy.
Then, when the time comes to file your tax return, you just need
to prepare a Schedule C (for individual taxpayers). If your
business makes a loss (i.e., the expenses you pay out are more
than the revenue you bring in from your business), that loss is
deducted from your income from all sources, thereby reducing
your taxes.
But, best of all, if you qualify for the home office deduction,
you can take a proportionate share of your mortgage or rent
payments and your utilities and apply them as a deduction
against your business profits, but only to the point where the
profit from your business equals zero. In other words, the home
office deduction cannot be used to create a loss situation. But
even if you can't deduct it this year (because your business has
already made a loss), it's not lost. You can carry it forward to
future years to be applied against future profits.
So, as you can see, even if you're only in the information-
gathering/learning stage of your business, if you have a profit
motive you're nonetheless in business and you can and should be
writing off your business expenses even if you're yet to start
generating revenues.
Make sure you keep proper records and substantiate all expenses
though. The IRS is, of course, well aware of the potential for
abuse of home business tax deductions and will be paying close
attention. That's fine though. If you have a profit motive, you
ARE running a business and you're *entitled* to take any
legitimate deductions that are available to you. To do anything
less is to leave money on the table.
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** Reprinting of this article is welcome! ** This article may be
freely reproduced provided that: (1) you include the following
resource box; and (2) you only mail to a 100% opt-in list.
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Elena Fawkner is editor of A Home-Based Business Online ...
practical business ideas, opportunities and solutions for the
work-from-home entrepreneur. http://www.ahbbo.com Also, visit
Elena's newest site, Web Work From Home
http://www.web-work-from-home.com
About the author:
Elena Fawkner is editor of A Home-Based Business Online ...
practical business ideas, opportunities and solutions for the
work-from-home entrepreneur. http://www.ahbbo.com Also, visit
Elena's newest site, Web Work From Home
http://www.web-work-from-home.com
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