Misconceptions, misinterpretations and just plain “untruths” are floating about income taxes. Believing them could be costing thousands of tax dollars!

Myth: A Professional Tax Preparer knows all there is to know about taxes so you don't have to know anything them.

Truth: Tax Preparer's/CPA's/Accountants are not uniformly informed about ALL tax laws. Most are able to file a personal income tax and know all the laws and how to apply them to personal income tax.

There are thousands of excellent, hard-working accountants doing a great job. And if you use a tax professional, maybe they have done everything possible to reduce your taxes. But many professional tax preparers are just tax preparers.

They may know how to prepare a tax return in their sleep. They know what numbers go on which form. But that's about all they know.

A good tax preparer is not trained in tax reduction strategies.

The only way you are assured to get the tax deductions you are entitled to, as a Home-Based Business Owner, is to become informed yourself.

Myth: You must "itemize" in order to take Home-Based Business expenses.

Truth: Many people misunderstand the terminology here.

When you "itemize" your income tax you file Form A&B and take such things as medical, home mortgage interest etc. You will only "itemize" if the total of Form A is over the standard deduction (for 2003 taxes…$4,700 single, $9,500 married)

Some people call this filing "long form."

All taxpayers have the opportunity to itemize if it is to their advantage.

Whether you "itemize" or not has NO bearing on your Business.

Myth: You're not making a profit so there is no advantage to filing business income taxes.

Truth: This is so not true! There's many tax advantages to filing a Home-Business tax return and especially so if you are not making a profit. If you also work a job, be it part-time or full time, in addition to your Home-Based business it is especially beneficial to you to file a business tax return.

Expenses incurred in your business can be taken against your job income thus reducing your taxable dollar, which decreases your tax liability.

Myth: Because you work a full-time job your Internet Marketing Business is just a hobby.

Truth: Only another Internet Marketer can truly understand the hours and money spent on what someone else would call a "hobby"!

The rules clearly state you have a business if you meet 8 rules. Four of the most important rules to meet are:

1. Expertise of the taxpayer or his/her advisors. That would mean your expertise in Internet Marketing or those who advise you. If you're learning and actively applying what you learn to your Internet Marketing activities and have a good "handle" on this…you qualify.

2. Time and Effort the Taxpayer puts into ‘running the business’. They just want to make sure you're running a real business, not just engaging in a hobby. How much “time and effort” is enough? The United States Federal Tax Court has ruled that “45 minutes a day, 4 to 5 days a week” qualifies.

I can't see anyone who is in Internet Marketing with a profit motive not qualifying here!

3. The Manner in Which the Taxpayer Carries On the Business Activity. This one is common sense. Do you conduct your business mostly on the telephone, over the Internet and in-home presentations (these are good), or mostly at the golf course, during lunches and at the pub (not so good). Just treat your business like a business.

4. Is the Primary Purpose of your activity to ‘Produce a Profit,” or to ‘Produce Tax Write-offs’? The best way to Pass the profit-motive test, is to have a Business Plan, and That Business Plan should include a table of Income and Expense projections, clearly showing profitability at some point in the future. Note that you are not required to actually produce a profit in order to qualify for home-business tax deductions -- just to show that you have the intent to produce a profit.

If you are doing all this then there is no reason for your business to be considered a "hobby".

Myth: You must make a profit within 5 years to be considered a "business" and file Home-Business taxes.

Truth: That's a generalization. Yes, the government would like to see you make a profit within 5 years but you are not penalized for not doing so. If you are following the above 4 rules and conducting yourself as a business you have nothing to worry about. You are a business and some businesses are not profitable for a number of years.

Myth: Learning how to reduce you taxes is hard and complicated.

Truth: Average Small Business Owners have plenty of tax reduction strategies at their disposal. You just have to know what they are and how to use them.

Once you learn what deductions are allowed you will know what figures your Tax Preparer/Accountant needs and you can configure your accounting accordingly.

Myth: Accounting and tax documentation for the Home-Business is not for the do-it-yourselfer.

Truth: All Small Business Owners can easily keep their own books using any number of software programs. It is not necessary to have an accountant.

No, you will not have to learn accounting. You will just need to be able to "categorize" and record expenses and sales.

Documentation for the government is very easy if you use a pocket calendar and keep your receipts.

In just 5-10 minutes a day you can have records that will withstand any government scrutiny.

Do You Qualify For Home-Based Tax Deductions?

New changes in the tax laws have made it easier than ever to claim Home Office Deductions and keep more of what you earn.

If your home is a place of business, many of your personal expenses can be deducted as business expenses resulting in lower taxes.

You may be thinking, "I have an Accountant/CPA/Tax Preparer/Tax Software who knows all about tax deductions so I don't have to know anything about them."

There are several reasons why that thinking could be costing you thousands of tax dollars. Some of those reasons are:

• Most Accountants/CPA's/Tax Preparers do not "specialize" in Home-Based Businesses and do not keep up with the ever-changing laws pertaining to them.

• You are ultimately responsible for knowing what you can and cannot deduct as business expenses. Why? YOU are accountable to the IRS for your deductions, not the tax preparer.

• If you pay someone to do your taxes you still need to know what you can deduct so that you can gather all relevant paperwork.

• The most compelling reason: Getting the greatest benefit from your deductions.

To qualify for these deductions you must meet 2 conditions, which most, if not all, Internet Marketers meet.

Condition 1: Do you work as an Internet marketer out of your home (on your "home computer)?

To qualify for deducting expenses related to using a workspace for business in your home, your home must be

• Your "principal place of business " or you must use the space only to earn your business income.

• Use it on a regular and ongoing basis to meet your clients, customers, or patients.

AND

Condition 2: Are you in business to make a profit?

Whether you made a profit or not is immaterial. Even if you lost money but intended to make a profit these deductions are still available to you.

If you answered yes to both of these questions then you do own a Home-Based Business and as such you are qualified to deduct Business Assets, Direct and Indirect Expenses.

Business Assets include business equipment such as computer, fax machines, business furniture such as desk (your dining room table for instance), desk chair and filing cabinets. These are 100% deductible if they are used "exclusively" for business purposes.

If these assets are not used "exclusively' for business the amount you can deduct is proportionally related to how much these things are used in your business. It is possible to deduct a portion of your living room, sofa, DVD player etc if you meet certain conditions.

Direct Expenses are those directly related to conducting your business. This would include office supplies, telephone service,, cellular phones, ISP service, hosting, advertising etc. Direct expenses are generally 100% deductible.

Indirect Expenses include such things as rent on your home, utilities including heating and air conditioning and general repairs such as replacing a roof or repainting the exterior of your home.

These are authorized legal deductions passed into law specifically for Home-Based Businesses by congress.

If you use your home for business purposes, many of your personal expenses can legally be converted into deductible business expenses including utilities such as heat and electricity, cleaning materials, house insurance and property taxes.

Learn all you can about what you can deduct and you will consistently save thousands on your income tax each year.

"I'm proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money." - Arthur Godfrey

This article was posted on February 08, 2004