Home Business Tax Deductions: Keep What You Earn

Home Business Tax Deductions: Keep What You Earn

by Stephen Fishman J.D.

Paperback(Fifteenth Edition)

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Pay less to the IRS

For any home business, claiming all the tax deductions you are entitled to is essential to your business’s financial success. Don’t miss out on the many valuable deductions you can claim.

Here, you’ll find out how to deduct:

  • start-up costs
  • home office expenses
  • vehicles, meals, and travel expenses
  • medical expenses under Obamacare, and
  • retirement expenses.

You’ll also learn how to keep accurate, thorough records in case the IRS ever comes calling. Easy to read and full of real-life examples, this book can help you take advantage of all the valuable deductions you are entitled to.

The 15th edition is completely updated to cover the new Tax Cuts and Jobs Act.

Product Details

ISBN-13: 9781413325744
Publisher: NOLO
Publication date: 09/30/2018
Edition description: Fifteenth Edition
Pages: 488
Sales rank: 499,810
Product dimensions: 6.90(w) x 8.90(h) x 0.90(d)

About the Author

Stephen Fishman has dedicated his career as an attorney and author to writing useful, authoritative, and recognized guides on business, taxation, and intellectual property matters for small businesses, entrepreneurs, independent contractors, and freelancers. He is the author of 20 books and hundreds of articles, and has been quoted in The New York Times, Wall Street Journal, Chicago Tribune, and many other publications. Among his books are Every Landlord's Tax Deduction Guide, Deduct It! Lower Your Small Business Taxes, and Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Gig Workers of All Types, published by Nolo. He is a two-time recipient of the Independent Book Publishers Association’s Benjamin Franklin Award.

Read an Excerpt

Once 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 need a basic understanding of how businesses pay taxes and how tax deductions work. This chapter gives you all the information you need to get started. It covers:

  • how tax deductions work

  • how businesses are taxed

  • what expenses businesses can deduct, and

  • how to calculate the value of a tax deduction.

How Tax Deductions Work
A tax deduction (also called a write-off) is an amount of money you are entitled to subtract from your gross income (all the money you make) to determine your taxable income (the amount on which you must pay tax). The more deductions you have, the lower your taxable income will be and the less tax you will have to pay.

Types of Tax Deductions

There are three basic types of tax deductions: personal deductions, investment deductions, and business deductions. This book covers only business deductions -- the large array of write-offs available to business owners, including those who work out of their homes.

Personal Deductions

For the most part, your personal, living, and family expenses are not tax deductible. For example, you can't deduct the food that you buy for yourself and your family. There are, however, special categories of personal expenses that maybe deducted, subject to strict limitations. These include items such as home mortgage interest, state and local taxes, charitable contributions, medical expenses above a threshold amount, interest on education loans, and alimony. This book does not
cover these personal deductions.

Investment Deductions

Many people try to make money by investing money. For example, they might invest in real estate or play the stock market. These people incur all kinds of expenses, such as fees paid to money managers or financial planners, legal and accounting fees, and interest on money borrowed to buy investment property. These and other investment expenses (also called expenses for the production of income) are tax deductible, subject to some important limitations. (See "Investing and Other Income-Producing Activities" in Chapter 2 for more on investment deductions.)

Business Deductions

Home business owners usually have to spend money on their businesses -- for example, for equipment, supplies, or business travel. Most business expenses are deductible sooner or later. It makes no difference for tax deduction purposes 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, however small, incurs some expenses. Even someone with a low overhead business (such as a freelance writer) must buy paper, computer equipment, and office supplies. Some home businesses incur substantial expenses, even exceeding their income.

You are not legally required to pay tax on every dollar your business takes in (your gross business income). Instead, you owe tax only on the amount left over after your business's deductible expenses are subtracted from your gross income (this remaining amount is called your net profit). Although some tax deduction calculations can get a bit complicated, the basic math is simple: The more deductions you take, the lower your net profit will be, and the less tax you will have to pay.

Example: Karen, a sole proprietor, earned $50,000 this year from her consulting business, which she operates from her home office. Fortunately, she doesn't have to pay income tax on the entire $50,000 -- her gross income. Instead, she can deduct various business expenses, including a $5,000 home office deduction (see Chapter 6) and a $5,000 deduction for equipment expenses (see Chapter 5). She deducts these expenses from her $50,000 gross income to arrive at her net profit: $40,000. She pays income tax only on this net profit amount.

You Must Have a Legal Basis for Your Deductions

All tax deductions are a matter of legislative grace, which means that you can take a deduction only if it is specifically allowed by one or more provisions of the tax law. You usually do not have to indicate on your tax return which tax law provision gives you the right to take a particular deduction. If you are audited by the IRS, however, you'll have to provide a legal basis for every deduction you take. If the IRS concludes that your deduction wasn't justified, it will deny the deduction and charge you back taxes, interest, in some cases, and penalties.

You Must Be in Business to Claim Business Deductions

Only businesses can claim business tax deductions. This probably seems like a simple concept, but it can get tricky. Even though you might believe you are running a business, the IRS may beg to differ. If your home business doesn't turn a profit for several years in a row, the IRS might decide that you are engaged in a hobby rather than a business. This may not sound like a big deal, but it could have disastrous tax consequences: People engaged in hobbies are entitled to very limited tax deductions, while businesses can deduct all kinds of expenses. Fortunately, careful taxpayers can usually avoid this unhappy outcome. (See Chapter 2 for tips that will help you convince the IRS that you really are running a business.)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, partnership, limited liability company, or corporation), and how you will pay tax on your business's profit.

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 Business, by Anthony Mancuso (Nolo).

Basic Business Forms

Every business, from a part-time operation you run from home while in your jammies to a Fortune 500 multinational company housed in a gleaming skyscraper, has a legal structure. If you're running a business right now, it has a legal form -- even if you never made a conscious decision about how it should be legally organized.

Most Home Businesses Are Sole Proprietorships

A sole proprietorship is a one-owner business. According to the Small Business Administration, 90% of all home businesses are sole proprietorships. Unlike the other business forms, a sole proprietorship has no legal existence separate from the business owner. It cannot sue or be sued, own property in its own name, or file its own tax returns. The business owner (proprietor) personally owns all of the assets of the business and controls its operations. If you're running a one-person
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 proprietor if two or more people own your home business, except in some states where a husband and wife can be co-sole proprietors (see "Home Businesses Owned by Spouses," below).

Table of Contents

1. Some Tax Basics
2. Is Your Home Really a Business?
3. Getting Your Business Up and Running
4. Home Business Operating Expenses
5. Deducting Long-Term Assets
6. The Home Office Deduction
7. Eating Out and Going Out: Deducting Meal and Entertainment Expenses
8. Getting Around Town: Car and Local Travel Expenses
9. Leaving Town: Business Travel
10. Inventory
11. Hiring Help: Employees and Independent Contractors
12. What if You Get Sick? Deducting Medical Expenses
13. Deductions that Can Help You Retire
14. More Home Business Deductions
15. Record Keeping and Accounting
16. Husband and Wife Home businesses
17. Staying Out of Trouble With the IRS
18. Help Beyond This Book

What People are Saying About This

From the Publisher

"Fishman translates complicated tax-law jargon into words you can understand and apply to your home-based business without a CPA."  Paul Tulenko, syndicated business columnist

Paul Tulenko

"Whether you're going to start or have already started your business, you need this book."
Paul Tulenko, syndicated business columnist


Understanding tax deductions is an essential part of any home business—without the money saved by taking deductions, many home businesses couldn’t get started or operate profitably. With this book, home business owners can rest assured that they are not paying more to the IRS in taxes than they need to. Practical and organized by chapter into the most commonly used home business tax deductions, this book shows how to plan for and take advantage of the tax breaks available to home business owners. From home office expenses to start-up expenses to health care costs to travel, meals and entertainment, this book shows home business owners how to deduct their business-related expenses and pay less to the IRS.

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