|
 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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