Uncover Tax Advantages of Running a Home-Based Business
Sometimes
it seems like every other television commercial or online ad is encouraging
you to start your own home-based business. If you have embarked on the work-at-home
adventure, remember to take advantage of the tax saving opportunities it
can offer.
Furniture, Computers and Supplies
In most homes, computers and the Internet are used for playing games, shopping, etc. But in the home office, the computer and the Internet are truly the workhorse. Home-based businesses are dependent on computers and printers to do a myriad of tasks, from ordering products to keeping the books. Computers and peripherals used strictly for business, along with associated supplies and programs, are fully deductible.
Since computers, telephones and other equipment typically sit on desks or other pieces of furniture, don't forget to deduct the cost of these items as well. Just be careful to document their business use
Internet and Telephone Service
In the same way that computers and other equipment are deductible, so are telephone and Internet service. In the case of the phone, the first line coming into your home is assumed to be used for personal reasons and thus not deductible. Second lines and fax lines can be fully deductible if they are used only for business. Internet service should also be limited to business purposes in order to secure that deduction.
Home Office
Many taxpayers are afraid to take a deduction for home office use. The reason most often cited is that it will flag their return for an audit, but that is not necessarily true. As long as you properly document the business use of a room in your home, you should have nothing to fear by taking the deduction. If you have any question as to whether you qualify, here is the rule directly from the Internal Revenue Service:
Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly.
As your principal place
of business;
As a place to meet
or deal with patients, clients or customers in the normal course of your
business;
In the case of a separate
structure that is not attached to your home, it must be used in connection
with your trade or business.
For certain storage use, rental use or daycare facility use, you are required to make use of the property regularly but not exclusively.
Assuming you do meet these rules, you can deduct a portion of your home's operating expenses, including:
Home mortgage interest
Property taxes
Insurance
Utilities
Repairs
The deductible portion of your home's operating expenses is based on a percentage determined by the size of the home office, divided by the size of the home.
Vehicle Expenses
If your home is your primary office, then traveling to purchase supplies, meet clients and perform other business tasks qualifies as business use of your vehicle. You have a choice between using the standard mileage rate or actual expenses for the operation of your vehicle, which includes depreciation. It is imperative to maintain a log throughout the year to document the mileage claimed.
Conclusion
In addition to providing an income (and maybe helping you keep an eye on your children), working out of your home can provide substantial tax benefits. Just take care to follow the rules and, above all, keep good records. If you are working at home, give us a call and let's make sure you are taking every deduction you are entitled to.
General Business News - Are You Charging Enough?
"Build a better mousetrap, and the world will beat a path to your door." That's how the saying goes, but how do you know whether it's the mousetrap or the product that's bringing buyers to your door? For that matter, how do you know if you've priced your product fairly? We will be discussing pricing strategies in this article.
Blame it on the Manufacturer
If you are in the retail business, a good starting point is the manufacturer's suggested retail price (MSRP). Sometimes, that's the only place to go. For example, a bedding manufacturer might establish the price at which you are to sell their product and you are not allowed to offer it for any less.
Most often, however, the MSRP is exactly what it says - a suggestion. In competitive markets, you might have to go below that to get the sale or you might just want to price a product to bring customers in to see it.
If you are bidding against other competitors, you most likely will not be able to use the MSRP. Whatever the reason for a variation, the MSRP is often just a starting point.
The End Justifies the Price - Sometimes
What drives traffic to your store? Is it catchy advertising, great prices or service? For grocery stores, it's typically a little of all three. When they run a special on eggs for 59 cents a dozen, do you stop and wonder if they are making money on them? You don't really care if they are; you just want the cheap eggs. The store probably is not making much on that offer, but meat and other products will help them turn a profit.
The eggs are loss leaders designed to get you in the door. The store is banking on you buying other groceries once you're in the door. The same happens with furniture stores and other retailers. Why wouldn't you want to do the same thing? The trick is to find items that will pull the customers in without giving the store away.
Do it the Old-Fashioned Way
The old-fashioned way to set the price of your product is to calculate the cost and then determine a reasonable markup. But how do you determine the true cost of your product?
In retail, the true cost is typically the purchase price plus shipping costs. The reasonable markup is what your competitors are charging. One way to determine a reasonable markup is to look at your bottom line. Ask yourself this question: Will the sale of my product at my targeted volume and planned price cover all my expenses, pay me a decent salary and provide a reasonable net income for the company? If the answer is yes, your pricing strategy is probably in the ballpark.
If you are a manufacturer, you can ask yourself the same questions; however, the inputs are more complicated. You must calculate the fixed costs (unchanging regardless of how much you produce) and the variable costs (raw materials, energy usage, etc.) of production. Whole books have been written describing the proper calculation of manufacturing costs. Suffice it to say that you might need a good cost accountant to help you determine those figures.
Other Considerations
Pricing is part of your overall marketing strategy. As such, you have to ask yourself what you are trying to achieve. Do you want to maximize sales by selling products for less? Do you want to maximize profits? Do you want to move old items? Each goal will require a different pricing structure, and you might have to practice until you get the mix just right. If you are just starting your business or struggling with your current pricing strategy, give us a call. We are here to help you make the right decisions.
Tip of the Month: IRS Launches Crackdown on Use of Contractor Workers
President Obama's budget for 2011 will bring yet more scrutiny of businesses that use independent contractors to minimize labor costs. This year the IRS will audit 2,000 companies for compliance. If the 2011 budget is approved, the Internal Revenue Service will get the green light to add 100 more enforcement officers over a three-year time period. According to White House projections, Federal coffers will gain $7 billion over a 10-year span as IRS auditors crack down on companies that have misclassified employees as independent contractors and collect employment taxes and penalties from the businesses involved.
The IRS selects companies by statistical sampling, and small businesses are just as likely to be audited as large corporations. The contractor crackdown follows several other policies designed to collect an estimated total of $350 billion, which the President believes is the shortfall created by noncompliance with tax laws. If you think the classification of your employees could be wrong, contact your tax professional as soon as possible. Don't take any chances. The tax code is vague, the IRS' assessments are hard to predict and penalties accrue daily.
Workers in the United States are usually employees or self-employed workers - otherwise called contract workers. The contractor tax issue is not new; neither are the problems that occur as companies try to classify their workers correctly. Problems arise because there is no clear, universal definition of what constitutes a contract worker. The IRS' own reclassification frequently is made years after a worker has been hired. The determination is made based on how much control the individual has over the scope of the job and the worker's exposure to costs and risk. For example, if a worker is required to come to the employer's place of business to work and be present for specific hours on specific days, he or she would most likely be classified as a payroll employee. High-tech consultants, home healthcare workers and construction workers are among those who are misclassified the most. If the IRS decides that a contract worker should have been classified as an employee, it could impose significant back taxes, interest and other penalties. These can be substantial and are owed to the IRS even if the contract workers paid their taxes in full.
The punitive nature of penalties has caused many employers to convert contract positions into payroll employees - even though contractor labor might provide savings of up to 30 percent on labor costs. Companies do not pay Social Security, Medicare, sick leave, etc. for contract employees.
The technology sector, where the use of independent, self-employed contractors is especially common, has seen a wholesale shift from contractors to employees. Unlike other sectors where contract workers often would prefer the health and other benefits of payroll employment, technology contractors were willing to forgo employer-provided benefits for the chance to grow their own business and make money. These opportunities began to dry up a decade ago when industry leaders were found guilty of misclassification and hit with big fines. Microsoft paid $6 million in employment back taxes and penalties in 2000 when an IRS team discovered 12,300 cases of misclassification.
If contract workers are a part of your workforce, don't gamble on avoiding an IRS review. Get help now to make sure you stay on the right side of the tax laws.
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