Last week I posted how a home based business can help reduce your tax burden. After starting our Home Based Business two years ago, I quickly found out how some of the ordinary personal expenses, can now move into a business category, simply by starting a home based business. I started to look at every expense I made and asked, “How can this expense benefit my business?”
I also looked at other expenses that came up because of my business and made the expense a much easier to make because I knew it was business related and could now qualify as a deduction. This long term thinking actually helped in generating revenue I could actually use and spend in the short term.
Qualifying
It’s easier than you think to qualify many of the ordinary expenses you make and turn them into business expenses. Check each of the statements below that accurately reflects your situation.
Category: Self-Employed Business Expenses
Deduction: Advertising
- I paid for advertising expenses related to my business.
- The advertising was ordinary and necessary for my business.
- I paid for public service advertising which relates to expected future business gain.
- The purpose of the advertising was not to lobby or influence legislation.
Deduction: Bad Debt (Business)
- I was unable to collect money owed to me or to my business.
- The debt arose because of my trade or business or was closely related to it.
- The debt became partly or totally worthless during this year.
- I have previously included the uncollectable amount in income, or it was a cash loan.
Deduction: Self-Employed – Gifts
- I gave gifts to business customers, clients or employees in the course of my business.
- The expense was both ordinary and necessary for my trade or business.
Deduction: Self-Employed – Entertainment
- I paid for entertaining clients, customers or employees.
- The expense was both ordinary and necessary to my trade or business .
- The entertainment was directly related to the active conduct of my business.
- The entertainment directly preceded or followed a substantial business discussion.
- The expense was not lavish or extravagant under the circumstances.
- I kept adequate records of my expenses.
Deduction: Self-Employed – Meals
- I paid for meals related to overnight travel, entertainment or employee benefits.
- The expense was both ordinary and necessary to my trade or business.
- The meals were not lavish or extravagant under the circumstances.
- I kept adequate records of my expenses.
Deduction: Car and Truck
- I used my car or truck in my business, or reimbursed my employees for car and truck expenses.
- If employees used my company car, I allowed only business use, or reported the personal portion of their expenses on their W-2 as compensation.
- I kept written records.
- The vehicle is unlikely to be used for personal purposes (such as a delivery truck that seats only the driver).
Deduction: Cost of Goods Sold
- My business manufactures products or purchases them for resale.
- I maintain inventories in order to determine the cost of goods sold.
Deduction: Home – Business Use (Self-Employed)
- I regularly used part of my home in connection with my trade or business.
- The business part of my home was used only for business, or to store inventory or product samples for a business selling products; or I had a day-care business in my home.
- I used the business part of my home as my principal place of business.
- I used the business part of my home to meet or deal with patients, clients or customers.
- The business part was a separate structure, not attached to my home.
Deduction: Insurance
- I paid for insurance premiums for the protection of my business.
- The insurance was ordinary and necessary to my trade or business.
- The premiums were not for life insurance on my own life, self-insurance reserve funds, or a loss-of-earnings policy.
Deduction: Interest – Mortgage
- I paid interest during the year on debts related to my business.
- I am legally liable for the debt.
- Both the lender and I intend that the debt be repaid, and we have a true debtor-creditor relationship.
- The debt is secured by property I own (if not, see Interest-Other).
Deduction: Interest – Other
- I paid interest during the year on debts related to my business.
- I am legally liable for the debt.
- Both the lender and I intend that the debt be repaid, and we have a true debtor-creditor relationship.
Deduction: Legal & Professional Services
- I paid legal, accounting and other fees directly related to operating my business.
- The expenses were ordinary and necessary for my business.
- The fees were not paid for work of a personal nature (such
as making a will).
- The fees were not paid for preparing that part of my tax return not relating to my business as a sole proprietor.
- Legal fees were not paid to acquire business assets (those should be added to the cost of the assets).
Deduction: Repair and Maintenance
- I spent money to keep my business property in normal, efficient operating condition.
- The expenses don’t add to the value of the property or significantly increase its life.
Deduction: Start-Up Costs
- I spent money to set up an active trade or business or to investigate creating or acquiring an active trade or business.
- The spending occurred before I began business operations.
- The costs would have been deductible if paid to operate an existing trade or business.
- The costs were common and accepted, as well as appropriate and helpful, in my business.
- I will deduct the costs in equal amounts over a period of 60 months or more (“amortize” them), beginning with the month I began business operations.
Deduction: Supplies
- I consumed and used materials and supplies during the tax year as a part of my trade or business. (The cost may include books, professional instruments, equipment, etc. that are normally used up in less than a year.)
- I have accounted for inventory of supplies and materials on hand at the beginning and end of the tax year.
- I don’t keep a record of when supplies are used, I don’t take an inventory of the amount on hand, and this method doesn’t distort my income.
- The use of the supplies is common and accepted in my field of business, and appropriate and helpful for my business.
Deduction: Taxes & Licenses
- I paid federal, state, local and foreign taxes and license fees directly related to my trade or business.
- The taxes were ordinary and necessary to the conduct of my business.
- Taxes paid on behalf of others, such as sales tax collected from customers, have not been included in gross income and are not deductible.
Deduction: Travel (Self-Employed)
- I spent money – for myself or my employees while traveling on business.
- The trip was taken because our duties required being away from the general area of our regular place of business for substantially longer than an ordinary day’s work.
- The assignment away from home was temporary.
- Sleep and rest were needed to meet the demands of the work while away from home.
- The expense was ordinary and necessary for the work and not lavish or extravagant.
I kept adequate records.
Deduction: Utilities
- I paid for heat, lights, power, and telephone for my business.
- None of this spending was for my personal use.
- I am not deducting any of the cost of basic local telephone service for the first phone line in my home.
- The costs were common and accepted in my field of business, and appropriate and helpful for my own business.
Deduction: Wages
- I paid wages and salaries which were directly connected to my business.
- The actual services performed by the employees are common and accepted in my field of business, and appropriate and helpful for my business.
- The amount of pay is reasonable, and an amount that similar enterprises ordinarily would pay for the same work under the circumstances.
Category: Self-Employed – Other Deductions
Deduction: Education (Self-Employed)
- I paid for tuition, books and other expenses for education related to my trade or business.
- The education maintains or improves skills required in my trade or business, or is legally required to keep my pay, status or job.
- The education is not necessary to meet the minimum educational requirements of my present trade or business.
- The education is not part of a program to qualify me for a new trade or business.
Deduction: Moving (Self-Employed)
- I spent money moving to a new workplace.
- The move was related to a change in my job location.
- My new workplace was at least 50 miles farther from my old home than my former workplace was. (If I didn’t have a former workplace, my new workplace was at least 50 miles from my old home.)
- Right after the move, I worked (or will work) full-time for at least 39 weeks during the first 12 months, AND for at least 78 weeks during the first 24 months.
- My new job ended because of death or disability.
Deduction: Health Insurance (Self-Employed)
- I paid for medical insurance or qualified long-term care insurance for myself and my family.
- I am self-employed, a general partner (or a limited partner receiving guaranteed payments) in a partnership, or a shareholder owning more than 2% of an S corporation.
- I paid the premiums, or my partnership or S corporation paid the premiums and included them in my gross income.
- I was not eligible to participate in any employer subsidized health plan (including my spouse’s) during any month for which I am taking a deduction.
Surprised? So was I when I first learned about all this. I think about all the money I paid to IRS over the years that I could have kept instead of paying, and we’re talking hundreds of thousands of dollars over the years. What I could have done with all that money? A nice vacation? A retirement plan? A bigger house? A new car?
The good news is that all these deductions started for our family two years ago.
They can start for you too, legally and ethically with minimal expense. Who knows, it could even provide the kind of lifestyle and freedom we now enjoy.
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Doug & Ronda Bauknight
AKA: TravelPro
Travel Agent / Networker
Phone: 678.458.5812
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Back around tax time this past year, I did a post on tax tip’s for owning a home based business, based on Ron Mueller’s book “It’s How Much You Keep That Counts!“. I just got word about a FREE webinar from the Tax Guru himself for this Sunday night, September 16th, @ 9:00 PM Eastern Time Zone. 
One of the most surprising things I found was that the IRS does not require you to actually make a profit in order to write off these expenses, you simply need to be in “pursuit” of a profit. How cool is that?!
