Home Based Business: When To File Business Tax Deductions
It is simply good business management to minimize your
tax liability whenever possible
through legitimate tax-reduction techniques, such as
business expenses. But what if you didn’t make any money at all? The only
thing that the government requires in order for you to claim business
deductions is that you are actively engaged in a trade or business. So, it really doesn’t matter rather or not you
made any money. Your main purpose for engaging in the business activity,
however, must be to make a profit, and the best way to indicate this is to
actually show a profit at some point. Most businesses usually suffer a loss
within the first 5 years, so don't get discouraged if you are in your 2nd or
3rd year and still don't see much of a profit. If you are engaged in an activity on a
regular and continuous basis, and your main purpose is to earn an income, you
have a trade or business and can claim business deductions.
Be sure your business is not a hobby. Having a
hobby means that your primary reason for engaging in the activity is to have
fun rather than to be profitable. The deciding factor in distinguishing a
business from a hobby is whether or not the activity is engaged in for profit.
Not to say that your business must produce a profit in order to be considered
a business, but if you incur losses, you must be able to demonstrate that your
primary motive in running the business is to produce an income. The IRS loves
to disallow losses to small business owners on the assertion that they are
hobby losses rather than business losses.
In general sole proprietors file Schedule C (“Profit or
Loss from Business”) with their Form 1040. The income or loss from the
business is combined with the taxpayer’s other income and deductions and taxed
at the individual rates. Sole Proprietors must also pay self-employment tax on
the entire net income from Schedule C. If there was a loss, then in most cases
if your earnings from self employment was less than $400 you do not have to
pay self employment tax.
There is a net income limitation rule that says your
business expenses cannot exceed your net income. Expenses which are not
allowed because they exceed your net income may be carried forward and treated
as business expenses for the next year. Of course, the carryover, as well as
the expenses incurred next year, are subject to the income limitation for that
year.
." This book will further help you to better
understand the host of complex tax issues surrounding a home-based business.
It further clarifies the current tax environment with regard to home-based
businesses, and shows you how to make the most of the new tax laws.