Save Taxes by Taking the Home Office Deduction

The IRS allows business owners and employees to deduct expenses for using part of their home for business purposes. This can help to save income taxes as well as self-employment taxes. For every $1,000 of additional deductions, a self-employed person may save around $500! Here are the rules:

The first rule is that the area you use for business must be used exclusively and regularly for business. This means that the guest room that you use as an office cannot be used for even a single night to host your guests.

The second is that your home must be your principal place of business. To determine if your home is your principal place of business you must use it for administrative or management activities such as billing customers and recordkeeping.

If you are an employee there are other criteria that must be met as well. You must use your home for the convenience of your employer and you must not rent any part of your home to your employer.

What can be deducted exactly? You can deduct items such as mortgage interest, property taxes, insurance, utilities, repairs and maintenance, and depreciation of your house. Even if you itemize and deduct mortgage interest and property taxes on your tax return, it is more advantageous to someone who is self-employed to deduct a portion of these expenses as business expenses. The reason is to save self-employment taxes.

Although some believe the home office deduction will increase your chance of an audit, this should not discourage taxpayers from taking this valuable deduction. As long as you follow the rules and keep good records, you should not be concerned. Keeping good records and adhering to the rules applies to all other deductions as well.

Do You Watch Shark Tank?

You have probably heard of the show Shark Tank, which airs on ABC on Friday nights. The show is about entrepreneurs who pitch their products and ideas to a group of wealthy investors who are referred to as “sharks.” Hopefully, the sharks will bite and offer to invest some of their money in the fledgling businesses.

Many times the sharks pass up on investing in the new business, which is very eye-opening for the entrepreneurs. Other times, more than one shark wants to invest in the business because there is a lot of upside, and the risk seems worth it. There are some great business lessons to be learned by all of this.

Research the market: Are there enough people that are willing to buy your product? Even so, what price should you sell the product for and who is your target customer?

Business model: Is there enough profit to be made? Does it make sense to spend a lot of money for the return that is generated? Is it costly to acquire customers?

Careful with your funds: Some entrepreneurs invest so much money in their product that they are now broke. Worse yet is that the product may not even be viable. Even if the business is good, the entrepreneur is eager to sell and may end up taking a lowball offer just to recoup their own investment.

Lack of Experience: When a product is good, the problem that entrepreneurs may have is usually manufacturing, distribution, and additional capital. Instead of selling a piece of your company, an alternative is to work with qualified professionals, such as consultants, attorneys, accountants, and competent employees.

Businesses are started every day. Some are successful, but unfortunately, many are not. The key to increasing your chance of success is to plan and be well thought-out. Just like preparing to take a test as a student, you have to study ahead of time to increase your chances of getting an “A.”