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