One of the top characteristics of a successful entrepreneur is knowing how to make smart financial decisions. What is the right moment to increase equity? How much of the profit should be reinvested in the business? And how many deductions can be included in the tax return?
This last aspect is very important for any home-based business owner, especially during the first few years after you have opened your business. Most certainly, you will not obtain a lot of profit just after you set up your business, and then you are hit with a tax return amount which could put your finances out of balance. This large tax amount, to be paid in the first one to two years after you started running your business, is usually due to the fact that you did not include all the deductions you are entitled to.
The taxation law is complex, with slight variations from state to state, but there is an underlying rule in favor of all entrepreneurs: the money you spend on your business, for various aspects pertaining to it, can be deducted from the business taxes you have to pay. Today we will make a list of the most important tax deductions you should not overlook when preparing the tax return for your home-based business:
1. Initial Setting-Up Costs
When you open any kind of business, even a sole proprietorship, you have to register with the IRS for tax purposes and with your state authorities, depending on the local regulations. All these registrations and document submissions are accompanied by fees and charges you have to pay. These are deductible amounts on your first tax returns and you should include all of them.
2. Utility Bills
In the case of utility bills you have to be careful to include only the part of your home utilities which are used exclusively in running your business. It is advisable to conclude separate subscription agreements with internet and telephony providers in the name of your business. In this way, you will include the adequate amounts in your tax returns and you avoid inquiries by the IRS.
3. Insurance
All businesses must hold an insurance policy for general liability. If you operate a home-based business in which customers come to your house for meetings or to pick up their orders, you need to conclude a third party liability insurance policy as well. Besides these business-related insurances, as a home-based business owner you can also deduct a part of your home insurance, health and life insurance.
4. Equipment and Inventories
Every asset which you purchase to use in the course of your business is tax deductible. Such assets include furniture (if you have to buy certain items to furnish your home office), computer, printer, etc. Also, you can deduct the expense with various inventories and materials which you purchase to use in making your products or supplying your services.
5. Car Expenses
If you use your personal vehicle to travel for business, you are entitled to deduct a part of your costs with gas and parking fees. In order to avoid any kind of problems with the IRS, keep track of your business-related travels in writing, all the receipts proving the expenses and a written memorandum explaining why that trip was necessary for your business. It may seem a hassle, but when the tax inspectors start asking questions, you should have all your answers in good order.
As you can see, there are so many things you can legally deduct on your tax return and, if you use them correctly, the final amount to pay will not be as high as you fear. Whenever you are in doubt about the eligibility of any expense to be included in your deductions, hire a tax consultant to help you out.