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Keeping
Track of Your At-Home Business Expenses
by
Jan K., The Proofer
If you are new to working at
home, then you might not be aware that you can
legally deduct many types of valid business
expenses, such as paper supplies or the second
phone line you install for your business, on your
self-employment income tax return (and thereby
reduce your taxable self-employment income). This
article concerns only general expenses and will
not deal with how to determine and deduct expenses
that relate to your in-home office space or
depreciable office furnishings/equipment. That is
a conversation for another day (and will be
covered in a future article).
First, let me congratulate
you on the fact that you are working at home!
Whether it is part-time, full-time, or just a
little something you do on the side for extra
money, working at home and being your own boss is
the lifelong dream of many people. Be proud that
you have achieved what so many do not.
Second, let me be very clear
that this article is written on the assumption
that you report your self-employment income---all
your income---and that you pay the self-employment
taxes that are due on that income. This article is
also based on tracking and recording legitimate
business expenses. Even if you have very modest
income and are using your kitchen table a few
nights a week as your office space, there are
still legitimate business expenses that you can
use to help reduce your self-employment taxable
income. The purpose of this article is not to help
you find ways to pad your deductions or to dodge
paying your taxes.
Last, this article is aimed
at those who are either new to working at home or
who need a simple explanation of a subject that
may seem twisted and tangled. Business expenses
and tax deductions don’t need to be scary
monsters that live with the dust bunnies beneath
the box spring of your bed. You don’t even need
a complicated method of data storage in order to
track your expenses and have quick and easy
numbers ready when it comes time to file your
taxes. In fact, you don’t really need much more
than a notepad and a nice box. Of course, if you
live for spreadsheets and bar graphs, you can get
as high-tech as you like. Personally, I have a
very simple Excel spreadsheet and four large file
folders (one for each quarter of the year).
OK,
let’s get started.
It is important to know what
qualifies as a “business expense.” Well,
that’s simple. A business expense is
money that you pay out of your pocket in order to
maintain your at-home business. An easy example
would be a business phone line. If you had a
second phone line installed as your business line,
then you can legally deduct 100% of the cost of
that phone line as a business expense. You can
also deduct the cost of equipment, installation,
and hook-up (for the tax year during which you
installed the line). Business expenses do not have
to be related to office equipment or furniture, or
even the actual work that you do. Legitimate
business expenses also include office supplies
like computer paper, ink cartridges, pens,
notepads, paperclips---literally anything that you
buy specifically for conducting your business.
I use this rule of thumb: If
I wouldn’t have purchased it otherwise, then it
is a business expense.
Now, I do understand that at
some time during your life, you would probably
have some reason to pick up a package of
paperclips or buy a couple of ink pens. What I’m
talking about are the things that you find that
you use regularly in the course of your business.
As an example, I have two clients for whom I must
send back-up floppy disks containing files of work
that I transmit to them via email. This means that
I regularly purchase floppy disks. Since we have a
second computer (that my husband fiercely regards
as “his”), it could be argued that we might
have purchased floppy disks any way. However,
since I routinely buy floppy disks in large
quantity, the cost of those disks is a business
expense. We have a small supply of blank disks for
our personal use that is separate from my business
supplies.
Once again, my thumb-rule
applies: If you buy it specifically for business
use and you use it during the course of doing
business, then it is a business expense.
Depending on the type of
at-home business you have, you may be well beyond
the “paperclips and pens” type of expenses. If
you have an in-home office (used specifically for
your business and nothing else), and you have
expensive business equipment (let’s say a
high-tech copier that can handle blueprints), then
your need to track business expenses and the
manner in which you are going to report these on
your self-employment income tax forms is a little
bit more complicated and may even require having
an accountant. This article does not address that
situation.
At the time of this article,
the IRS allows business expense deductions up to
$2,500.00 without requiring you to itemize your
expenses into pre-set categories. That is, you can
simply report a lump sum of $1,879.32 without
having to explain it. The IRS “trusts” you. If
your business expenses exceed $2,500.00, then you
must file a “long form” and categorize your
expenses as specified by the IRS. Although it is
relatively easy, it does mean that you have to
track your business expenses a little more closely
(And is subject matter for another article). So,
for the moment, let’s just concentrate on
getting you accustomed to following a few simple
steps to track your business expenses.
#1---Always pay separately
for your business expense items, regardless of
whether by cash, check, debit card, or credit
card, and save the receipt. If you are able
(and are disciplined enough), then get a credit
card with a reasonable credit limit and use it
exclusively for business purposes. When the
statement comes in each month, staple your saved
receipts to the statement and pay off the balance
(unless you are temporarily “floating” the
purchase of an expensive item). The goal here is
to learn the habit of paying separately for
anything you purchase for business purposes and to
save the receipt.
#2---Designate a file folder,
storage box, or some other specific place in which
to accumulate your receipts. I find it easy to
have four “pocket-type” file folders (the kind
with the fold-over flap and elastic bands at the
bottom). These folders are labeled for the four
quarters of the calendar year (Jan-Mar, Apr-Jun,
Jul-Sep, Oct-Dec). During the quarter, I just toss
my receipts in the proper folder. If the receipt
is not self-explanatory (or does not print out a
description of the item), then I make a short note
to myself (“presentation folder for Flamingo
Publishing proposal”) on the receipt.
#3---At the end of the
quarter, organize your receipts (I put mine in
date order), and record the dollar amounts.
Calculate your total quarterly business expenses.
(Please note here that if by the end of the second
quarter [June 30th] you have accumulated more than
$1,125.00, then it is likely that you will exceed
the $2,500.00 limit for non-itemized deduction
purposes. If that is the case, you will need to
track your expenses by the categories that are
pre-set by the IRS so that you can show total
amounts in each category.)
#4---At the end of the year,
and after you have calculated your expenses for
the 4th quarter, add the four quarters to
determine your net business expenses.
Voila! You have just tracked your business expense
for the entire year!
Eventually, you will need
this dollar amount in order to calculate your net
taxable income from self-employment. If you are
not planning on filing your taxes early in
January, then bundle up the receipts and save the
printout (or penciled in figure) of your total
business expenses. You should establish another
file folder/box/storage area for this information
and whatever other self-employment forms you are
accumulating for Filing Day.
Tracking your business
expenses doesn’t have to be hard or complicated.
Make the system suit your style---and just
remember: pay for the item(s) separately and keep
the receipt!
Please look for future
articles that will help you file your
self-employment income and calculate your
self-employment taxes due.
Jan K., The Proofer is a
full-time freelance proofreader and copyeditor. In
business since 1995, she has enjoyed working for a
diverse world-wide clientele, covering subject
matter including academic research, medical law,
consumer surveys, and self-help materials. Please
visit http://www.janktheproofer.com
for more information.
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