Tax Tips for Home Business Owners
Tax season is here, and if you haven't already, now's the time to start getting your documents in order. Homebusiness owners face special deductions and rules than those of other business owners. You can save yourself a lot of money by understanding how you can take advantage of your special situation.
Follow these tips for preparing and filing your taxes this year:
Know Your Deductions
Could you have missed something that might be deductible? Here's quick list of business deductions homebusiness owners can take:
- Auto/vehicle expenses (The mileage rate for 2005 is 40 1/2 cents a mile, but you still may be better off using actual expenses with rising costs of gasoline, auto insurance, etc.)
- Business cards and stationery
- Business meals and entertainment expenses (While what you spend is typically limited to 50%, there are circumstances where you can deduct more, such as if you're a trucker or serve food to business guests in your home)
- Business travel
- Interest payments on business credit cards
- Internet access and web-related expenses
- Office furniture
- Office supplies
- Phones and communication
- Postage and overnight delivery
- Publications and subscriptions
- Professional services and consultants
- Rent, including for an outside storage locker for business items
Deductions you want to be sure to take on your Form 1040 (and not your Schedule C or other business return) are:
- One half of your self-employment tax amount as a deduction against total income on your Form 1040. Since it can be as much $11,160 (plus 2.9% for Medicare), if your net earnings are $90,000 or more, you'll be sure to want to take this savings.
- Up to 100% of medical insurance costs you've paid for yourelf, your spouse and dependents.
Using the C-EZ Form
Anyone with net earnings of $400 or more from self-employment must file a tax return. So if you're reading this, chances are this is you. However, if your business is new or you've had an off year, you may qualify to file a Schedule C-EZ if your business expenses were $5,000 or less, you don't keep any kind of inventory, don't take a home office deduction, and don't need to file a Form 4562 for depreciation and amortization. The IRS estimates half a million more small-business owners will be able to use the C-EZ form this year.
But before you opt for the C-EZ form, you'll want to make sure your expenses don't exceed $5,000. Be sure to consider if you're taking all you're entitled to. Review your expenses by looking again at your year's worth of cancelled checks and credit-card receipts. Instead of reviewing monthly statements, you can look a year-at-time if you get annual reports from your credit-card company. Many companies will mail these or make them downloadable from the web.
Set Up an SEP-IRA Account
Even though 2005 is past, if you've had a good year you can still save money by setting up an SEP-IRA retirement fund account as late as when you file your tax return. This is true even if you're getting an extension. While it takes money to fund your SEP-IRA, keep in mind that what you save in taxes will pay for part of this investment, and this money will be available to you in years to come.
Choose the Right Preparation Service
You need to decide if you're going to prepare and file your taxes yourself using tax software like Turbotax or Taxcut, or use a tax professional such as a CPA, public accountant, enrolled agent or tax service that advertises services for small businesses. Using a tax professional has many advantages, such as saving you time and frustration. Also, professionals may spot deductions you might miss and identify problems you may have, and thus more than justify their fees. You can locate a CPA specializing in small business using the CPA Directory and find enrolled agents through their professional association, the National Association of Enrolled Agents, at www.naea.org. You can also use their referral line at (800) 424-4339.
Get Your Refund Quicker
If you're expecting a refund, you're more apt to receive it quickly by filing electronically. You can file an increasing number of business tax returns and forms yourself, without the help of a tax preparer. A list of what you can and can't file electronically can be found by downloading this PDF file from the IRS. Other advantages of filing electronically include fewer errors in processing and an electronic receipt from the IRS that acknowledges your return has been received.
Tips for Easy Filing Next Year
Take the opportunity now to prepare for next year. Did you spend inordinate time or frustration finding something you needed? If so, what filing and organizing steps might you take to prevent the problems you encountered with this year's taxes? Would it be easier to enter cash expenses and download credit-card transactions directly into your money management program?
You may find these downloadable IRS publications in PDF helpful:
- Publication 334, Tax Guide for Small Business
- Publication 463, Travel, Entertainment, Gift and Car Expenses
- Publication 535, Business Expenses
- Publication 587, Business Use of Your Home
Authors and career coaches Paul and Sarah Edwards are authors of 16 books. Their latest book is a new edition ofMaking Money with Your Computer at Home. Free portions of their books are available at www.workingfromhome.com.
For reprints and licensing questions, click here.