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Old 04-02-2004, 09:52 PM
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Default Reduce Taxes With A Home Business

What would you think if SavingAdvice.com said that you could reduce your utilities, mortgage, real estate taxes, house insurance, house repair work, and much more by 10% or more starting tomorrow with one easy move. What if we further told you that not only would you be able to reduce these costs, but there also is the potential of earning money by reducing these expenses. If you are a true SavingAdvice, you would look at us with a very skeptical eye and ask us to show you how it could be done. That's exactly what we're going to do. Then, continuing to be the good saver that you are, you will go out and research to confirm that what we're about to show you is one of the best ways to save and make money.

Before we get started, let's talk a little bit about tax deductions. Most people know the basic tax deductions the average American is entitled to deduct. These include interest on a home mortgage, property taxes, contributions to qualified retirement accounts and charitable contributions. There are some others depending on your circumstances, but those are the basic deductions of which all of you are most likely aware. What you probably have not considered (unless you are already doing so) is that the tax deductions allowable to business owners are much greater in breath. Business owners can deduct almost any cost, with some exceptions, related to their business. The key to getting the above savings we mentioned is to simply start your own home business.

Qualifying for the deductions allowed to home businesses is not difficult at all. There are some basic requirements that you need to meet which are all pretty straight forward (refer to IRS Publication 587 - Business Use of Your Home), but should pose little problem for most people. The main requirement is that the area you use in your home for your business should be used exclusively for your home business. That means it has to be a defined area like a room and that the area should not have kids coming in to play games on the computer or your spouse using the area to do non business related activities. It's a business, and only business, area.

Once you have the office space determined, all the expenses directly related to that space and your business are 100% deductible. If you paint the room, buy office furniture and equipment or put down a new floor, you can deduct 100% of the cost. Anything that is specific to the business area and your business will most likely qualify for this full deduction.

You will also want to determine the percent of your home that is being designated for office use. This is important for calculating a number of indirect expenses that you will also be able to deduct. In the beginning of this article, we said you could deduct 10% of a lot of household expenses. The actual percentage you can deduct is determined by the percentage of space your home business is using. For example, if you have a home that totals 1,750 square feet, and the office space you'll use for your home business is 175 square feet, then your home business office is 10 percent of the total house space. The amount you are able to deduct on the indirect expenses is directly related to this percentage, and in this case, you would be able to deduct 10% of all of your indirect business expenses.




Indirect expenses include everything that is required for running the entire home. Examples include the interest you pay on your mortgage, rent, utilities (including water, electricity and gas), general repair work and improvement to the entire house, insurance, real estate taxes, casualty losses on the house, security systems and waste removal. For example, if your utilities total $3,000 for the year, and your office to house ratio is 10%, you are allowed a $300 business related deduction for the utilities. If your rent comes to $7,200 for the year, you have an additional $720 business related deduction. You can use IRS Publication 587 (Business Use of Your Home) to help you determine all the business expenses you can deduct and how to accurately calculate them.

As you can see from the above example, one of the great benefits of a home based business is that you don't have to create new expenses to get the deductions. You would pay the $7,200 in rent whether you had the home based business or not. The same is true with the $3,000 in utility bills. You can save a large amount of money simply by converting already existing expenses that aren't deductible to you personally into legally deductible home business expenses, thus saving you thousands of dollars a year.

Say that you start a home business selling items you find at garage sales on Internet auctions. You purchase all the items for $500 and sell them for $1500 giving you a $1000 profit. If you have not set up a home business, that $1000 in profit is taxable. If, however, you have set a room aside for exlusive use for your Internet auction business in your house and it takes up 10% of the space in your house, you can make the following deductions.

$7200 (rent) x 10% = $720
$3000 (utilities) x 10% = $300

With the home business, you will not have to pay any taxes on the $1000 in profit because the expenses for your home business ($1020) can be deducted. You would actually report a "loss" for your home business to the IRS even though you have $1000 in your pocket. Again, the key here is that you are able to deduct profits from expenses you would have even if you didn't have the home business.

Another home business requirement is that you have to actively try to make a profit. This doesn't mean you have to make a profit, it just means you have to try to. If your home business continues to run at a loss for several years, it could possibly pose tax problems. The IRS has been known to audit home businesses that year after year operate without turning a profit since this is a red flag that the owners may be running the business simply to accumulate tax deductions to reduce their overall tax obligations.

Take the time to research this more and you will probably ask yourself why you didn't start a home business long ago. The tax benefits and savings you will receive from beginning a home based business are enormous. Although this article is a good starting point on the advantages of having a home business, there is a lot more detailed information out there. For starters, you can learn what can and can't be deducted by examining IRS Publication 535 (Business Expenses) for an overview of deductible costs, and IRS Publication 587 - (Business Use of Your Home) for all the home related tax issues you need to know about. You can also contact an accountant or tax lawyer who specializes in home business to fully appreciate the amount you can legally deduct, and to be clear on all the record keeping you'll need to provide to justify your deductions. A little time invested in knowing the advantages of having a home based business will save you thousands of dollars every year.
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