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The following article was published in our article directory on August 13, 2012.
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Home Based-Businesses- Getting Along With the I.R.S.

Article Category: Advice

Author Name: James F Hughes

Home- Based Businesses- Tips for getting along with the I.R.S.
If you operate a home-based business, or if you are thinking about starting one, you need to give careful consideration to satisfying the Internal Revenue Service (IRS) while keeping some of your hard-earned profits for yourself. In this brief article, I want to discuss several key points that will help you to stay out of trouble while minimizing your tax bill. I will begin with a simple explanation of the IRS's authority to collect taxes, discuss proper record keeping, and end with several tax saving tips for the home-based entrepreneur. To begin, where does the I.R.S. get their authority to collect your money?
Contrary to what some "tax protestors" might tell you, the income tax is in fact fully constitutional. The Sixteenth Amendment to the Constitution establishes the right of the Congress to pass laws to collect an income tax without apportionment among the states. The Sixteenth Amendment was ratified in 1913 and has withstood the test of time; so the I.R.S. really does "Have what it takes to take what you have..." An interesting aspect of our income tax code, the definition of income, is found in Section 61 of the Internal Revenue Code: Income is defined as "...all income from whatever source derived...." What this means, at least theoretically, is that any income exempted from taxation is exempted by an act of legislative grace. Finally, when dealing with the I.R.S. you are, at least initially, dealing with an administrative agency, not a court of law. This means that some of the rules, like presumption of innocence, don't necessarily apply, which brings us to the next topic; proper record keeping.
As a small business owner, you are required to give an accounting for the income and expenses of your business when you file your federal taxes regardless of the form of your business. Certainly the most common form, used by sole proprietors and single member LLCs, is Schedule-C, which is essentially an income statement. The important point to remember about your income taxes is that you are responsible for maintaining adequate accounting records to support your income tax return; this is true whether you prepare your own taxes or have them done by a paid-preparer. Should the I.R.S. come calling, it simply will not do to tell them "...I don't know, my tax guy filled out the forms....." Without proper documentation, you have a much greater chance of having even legitimate deductions disallowed, causing an unnecessary increase in tax liability. To satisfy the record keeping requirements, you do not need to have an elaborate accounting system, unless your business is complicated (I have clients operating out of their homes with over a million dollars a year in revenue; they need serious accounting systems). For very small businesses a paper and pencil system to keep track of revenue and expenditures may be sufficient. For larger businesses the investment in a software accounting system may be a good option. The systems from Quick Books are the most popular and are very powerful; just make sure that you take the time to learn how to use the software (garbage in/garbage out) and have a Quick Books Pro Advisor on speed dial! Incidentally, it is very easy to make a complete hash of things using Quick Books, or any other accounting software, and unless you are an accountant, you probably won't know it. Once you have established your record keeping system there are several great deductions that deserve your consideration: I will present a few in the next section.
Possibly the first deduction that one thinks of when talking about home-based businesses is the home office deduction; proceed with caution. You are permitted to take deductions for expenses relating to the portion of your home that is used exclusively for business, however, this particular deduction has been greatly abused over the years and is very much "on the radar screen" of the IRS. There are several things to keep in mind when taking this deduction. First, this should go without saying, however, don't cheat. Second, if you take a deduction for depreciation on a portion of the home used for business, you are reducing the cost- basis of your home. When you sell your home, the depreciation is recaptured and could cause an unintended taxable gain on the sale. Finally, be prepared with documentation to support your deduction. Another deduction that can be very significant is the mileage deduction for the business use of your personal vehicle. The current standard mileage rate is 55.5₵ per mile. Clearly, this deduction can add up fast and result in significant tax savings.
The important point with mileage is to keep an accurate, daily log of your business miles. Should your mileage deduction be questioned, a log will satisfy the auditor.

Keywords: Home-based business and income taxes

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