If you started a homebased business in 1997 but didn't receive much income from it, you may be wondering whether it's worth the hassle to declare the business on your income taxes. Ruth Perryman, owner of ProfitAbility Management, an accounting and finance firm in San Rafael, California, says there's no question about it: "If you don't claim the income you receive from your business and you are audited, the IRS can question every deposit you've made during the year to all your accounts, both personal and business." If the IRS audits you and determines you intentionally chose not to report all your income, you can be charged with fraud. "To put it simply," says Perryman, "if you are making money, you absolutely must claim your business income."
The upside: You can also deduct business expenses. "You shouldn't be worried about an audit as long as you've prepared your taxes honestly and have documentation to back up your deductions," Perryman says. "Just keep all your receipts, canceled checks, and logs outlining auto and computer usage, and you should have no problem.
"My first year in business, I held a full-time job and still wrote off my start-up costs, which resulted in a net loss for my business, against my regular income. This made the cost of starting a home office much easier to bear."
Want to make sure you get every deduction you're entitled to? Perryman offers these tips:
- If you use a room in your home solely for business--and it's your principal place of business--you can deduct a percentage of your monthly housing expenses, including electricity, water, garbage and the like. You can also deduct a percentage of maintenance expenses, such as painting.
- Other deductible items homebased businesses tend to overlook include business use of a car, books, trade journals and postage. Keep receipts for even the smallest items, because they add up.
- You can generally deduct the purchase of capital equipment (items with a useful life of more than one year, such as computers) up to $18,000 in 1997 without depreciating the cost over a number of years. This deduction is subject to limits, so be careful figuring your deduction amount.
Perryman warns that every situation is different; be sure to ask your accountant before applying these suggestions to your business.
Professional Office Solutions Inc., (201) 507-0525, http://members.aol.com/ProfOffSol/index.html
ProfitAbility Management, 998 Las Pavadas Ave., San Rafael, CA 94903, RPerryman1@aol.com
The Sequoia Group Inc., SEQUOIA_GROUP@msn.com