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All rights reserved.  e NOLO trademark is registered in the U.S. Patent and Trademark Offi ce. Printed in the U.S.A. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without prior written permission. Reproduction prohibitions do not apply to the forms contained in this product when reproduced for personal use. For information on bulk purchases or corporate premium sales, please contact the Special Sales Department. Call 800-955-4775 or write to Nolo, 950 Parker Street, Berkeley, California 94710. Please note We believe accurate, plain-English legal information should help you solve many of your own legal problems. But this text is not a substitute for personalized advice from a knowledgeable lawyer. If you want the help of a trained professional—and we’ll always point out situations in which we think that’s a good idea—consult an attorney licensed to practice in your state. Acknowledgments Many thanks to: Lisa Guerin and Diana Fitzpatrick for their superb editing Terri Hearsh for her outstanding book design About the Author Stephen Fishman is a San Francisco-based attorney and tax expert who has been writing about the law for more than 20 years. He is the author of many do-it-yourself law books, including Home Business Tax Deductions, Every Landlord’s Tax Deduction Guide, and Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants. All of his books are published by Nolo. He is often quoted on tax-related issues by newspapers across the country, including the Chicago Tribune, San Francisco Chronicle, and Cleveland Plain Dealer. Table of Contents Your Home Business Tax Deductions Companion 1 1 Some Tax Basics 3 How Tax Deductions Work 4 How Businesses Are Taxed 7 What Businesses Can Deduct 14 Adding It All Up: e Value of Tax Deductions 16 2 Is Your Home Business Really a Business? 23 Proving at You Are in Business 24 Tax Consequences of Engaging in a Hobby 34 Investing and Other Income-Producing Activities 35 3 Getting Your Business Up and Running 45 What Are Start-Up Expenses? 46 When Does a Business Begin? 51 Claiming the Deduction 53 If Your Business Doesn’t Last 15 Years 53 Expenses for Businesses at Never Begin 55 Avoiding the Start-Up Tax Rule’s Bite 56 4 Home Business Operating Expenses 59 Requirements for Deducting Operating Expenses 60 Operating Expenses at Are Not Deductible 68 How to Report Operating Expense Deductions 69 5 Deducting Long-Term Assets 71 Long-Term Assets 73 Section 179 Deductions 84 Bonus Depreciation 95 Regular Depreciation 100 Tax Reporting and Record Keeping 115 Leasing Long-Term Assets 117 6 e Home Office Deduction 121 Qualifying for the Home Office Deduction 122 Corporation Employees 135 Calculating the Home Office Deduction 136 IRS Reporting Requirements 154 Audit-Proofing Your Home Office Deduction 155 7 Eating Out and Going Out: Deducting Meal and Entertainment Expenses 157 What Is Business Entertainment? 158 Who You Can Entertain 160 Deducting Entertainment Expenses 160 Calculating Your Deduction 166 Reporting Entertainment Expenses on Your Tax Return 173 8 Getting Around Town: Car and Local Travel Expenses 175 Deductible Local Transportation Expenses 176 e Standard Mileage Rate 179 e Actual Expense Method 183 How to Maximize Your Car Expense Deduction 199 Other Local Transportation Expenses 201 Reporting Transportation Expenses on Your Tax Return 201 When Clients or Customers Reimburse You 203 9 Leaving Town: Business Travel 205 What Is Business Travel? 206 Deductible Travel Expenses 214 How Much You Can Deduct 216 Maximizing Your Business Travel Deductions 228 Travel Expenses Reimbursed by Clients or Customers 230 10 Inventory 233 What Is Inventory? 234 Maintaining an Inventory 237 Deducting Inventory Costs 239 IRS Reporting 245 11 Hiring Help: Employees and Independent Contractors 247 Employees Versus Independent Contractors 248 Tax Deductions for Employee Pay and Benefits 252 Reimbursing Employees for Business-Related Expenditures 262 Employing Your Family or Yourself 268 Tax Deductions When You Hire Independent Contractors 278 [...]... business. ) Chapter 1  |  Some tax basics  |  7 How Businesses Are Taxed If your home business earns money (as you undoubtedly hope it will), you will have to pay taxes on your profits How you pay those taxes will depend on how you have structured your business So before getting further into the details of tax deductions, it’s important to understand what type of business you have formed (a sole proprietorship,... 4  |  Home business TAX Deductions O nce you start your own business, you can begin taking advantage of the many tax deductions available only to business owners The tax code is full of deductions for businesses—and you are entitled to take them whether you work from home or from a fancy outside office Before you can start using these deductions to hang on to more of your hard-earned money, however, you. .. whether you run your business from home or from an outside office or workplace—either way, you are entitled to deduct your legitimate business expenses This book is about the many deductions available to people who are in business and who happen to work from home You Pay Taxes Only on Your Business Profits The federal income tax law recognizes that you must spend money to make money Virtually every home business, ... how you will pay tax on your business s profit Resource Need help figuring out how to structure your business? Although most home businesses are sole proprietorships, that may not be the best business form for you If you need to decide how to organize a new business or you want to know whether you should change your current business form, refer to LLC or Corporation? How to Choose the Right Form for Your... active trade or business 20  |  Home business TAX Deductions Total Tax Savings When you add up your savings in federal, state, and self-employment taxes, you can see the true value of a business tax deduction For e ­ xample, if you re in the 25% federal income tax bracket, a business d ­ eduction can be worth as much as 25% (in federal taxes) + 13.3% (in self-employment taxes) + 6% (in state taxes) That... savings (If you itemize your personal deductions, your actual tax savings from a business deduction is a bit less because it reduces your state income tax and therefore reduces the federal income tax savings from this itemized deduction.) If you buy a $1,000 computer for your business and you deduct the expense, you save about $443 in taxes In effect, the government is paying for almost half of your business. .. the assets of the business and controls its operations If you re running a one-person 8  |  Home business TAX Deductions home business and you haven’t incorporated or formed a limited liability company, you are a sole proprietor However, you can’t be a sole p ­ roprietor if two or more people own your home business, unless you are one of two spouses who jointly own and run their home business together... income tax system for individual taxpayers with six different tax rates (called tax brackets), ranging from 10% of taxable income to 35% (see the chart below) The higher your income, the higher your tax rate Chapter 1  |  Some tax basics  |  17 You move from one bracket to the next only when your taxable i ­ncome exceeds the bracket amount For example, if you are a single taxpayer, you pay 10% income tax. .. called your marginal tax bracket For example, if you have $70,000 in taxable income, your marginal tax bracket is 25% To determine how much federal income tax a deduction will save you, multiply the amount of the deduction by your marginal tax bracket For example, if your marginal tax bracket is 25%, you will save 25¢ in federal income taxes for every dollar you are able to claim as a deductible business. .. income for ­ncome tax purposes and (2) you pay self-employment i tax on only 92.35% of your net self-employment income Chapter 1  |  Some tax basics  |  19 Like income taxes, self-employment taxes are paid on the net profit you earn from a business Thus, deductible business expenses reduce the amount of self-employment tax you have to pay by lowering your net profit This makes business tax deductions . classi ed as a “hobby” 8th Edition Keep What You Earn INCLUDES THE LATEST TAX LAW CHANGES Stephen Fishman, J.D. author of Deduct It! Lower Your Small Business Taxes Home Business Books &. Contents Your Home Business Tax Deductions Companion 1 1 Some Tax Basics 3 How Tax Deductions Work 4 How Businesses Are Taxed 7 What Businesses Can Deduct 14 Adding It All Up: e Value of Tax Deductions. lower taxes—and keeping more of your hard-earned dollars—is to take advantage of every tax deduction you can. If you have a legitimate home business, you may be able to deduct: • a portion of your