National Association of Tax Professionals writes: Picking up a second job to supplement
household income in a tough economy is becoming more common. Many
Americans are choosing to become consultants who visit homes to sell
make-up, jewelry, candles, kitchen utensils and food products. Some may
not realize the tax implications of becoming a sole proprietor and what
they need to do to file taxes.
Your first step when starting a business
is to open a separate business checking account. It will be easier to
track your deductible expenses if they are not commingled with your
personal expenses. If you incurred expenses prior to opening your
business, keep them separate from your other expenses. Special tax
treatment applies to start-up expenses.
It’s also important to keep track of your
mileage, because you might be able to deduct it on your tax return. If
you are self-employed and maintain an eligible office in your home, you
can deduct the mileage to and from your client’s or customer’s place of
business, as well as between jobs. There are two ways to calculate your
auto deductions: the standard mileage rate or actual expenses.
The standard mileage rate is the easier
method to use because you simply take your total business mileage and
multiply it by the current rate ($.56 for 2014). The actual expense
method requires you to record the actual expenses, such as the cost of
gas, oil, insurance, repairs, maintenance, tires, washing, licenses and
depreciation. If you use your car for personal and business purposes,
you’ll have to divide the expenses between the personal and business
portion, so keeping detailed records is a must. The business miles for
the year divided by the total miles for the year determine the business
percentage of your actual expenses.
If you use an automobile for business,
you may be able to receive a tax deduction to lower your income tax.
Unless your car is used 100 percent for business, some of your expenses
aren’t deductible. The IRS is quick to question a vehicle used 100
percent for business. Do you, for example, keep the car at the company
headquarters over night?
Deducting auto expenses requires diligent
record-keeping. There are two ways to calculate your auto deductions -
the standard mileage rate or actual expenses. These methods are
available whether you own or lease your vehicle.
Taxpayers who wish to use the standard
mileage rate in lieu of actual expenses for computing deductible vehicle
expenses must elect to do so in the first year. Switching to the
standard mileage rate in a later year is not an option.
The actual expense method is as exactly
as it sounds. Actual expenses, such as the cost of gas, oil, insurance,
repairs, maintenance, tires, washing, licenses and depreciation or lease
payments, are eligible.
For the standard mileage rate method,
instead of tracking the above expenses, you track the business mileage
you accrue and use a standard rate. The standard rate is 56 cents per
mile.
You’ll need to keep accurate records of
the miles incurred for business purposes, dates of business use,
destinations and the business purpose. Also, you’ll need to note the
odometer readings at the beginning and end of the year to determine the
total miles for the year for all uses. The important aspect is to make
sure you maintain accurate records. The IRS may disallow a deduction for
mileage if you are unable to substantiate your deduction.
It’s important to note that you cannot
deduct commuting mileage (mileage from your home to your regular job).
It is necessary to determine your tax home. If you are self-employed and
maintain an eligible office in your home, you can deduct the mileage to
and from your client’s or customer’s place of business, as well as
between jobs. As an employee, you can deduct mileage between jobs or to a
temporary assignment. If you do not have a regular place of business,
you can only deduct your transportation expenses to a temporary location
outside your general area of employment.
Generally, in order to claim a business
deduction for your home, you must use part of your home exclusively and
regularly as your principal place of business, as a place you meet your
clients, or in connection with your business, where the business portion
of your home is a separate structure not attached to your home.
For the most part, the amount you can
deduct depends on the percentage of your home used for business. Your
deduction for certain expenses will be limited if your gross income from
your business is less than your total business expenses.
It’s important to note that there are
special rules for qualified daycare providers and for persons storing
business inventory or product samples in their home.
There are benefits to hiring your
children to work for you. If your children are under the age of 18, you
are not required to withhold social security and Medicare taxes from
their wages. You are also not required to pay federal unemployment taxes
on their wages until they reach the age of 21.
Only self-employed business owners can
take advantage of this benefit. Partnerships are included in this
category as long as the parents are the only partners. If your business
is incorporated, the children are considered employees of the
corporation, and are subject to the normal payroll taxes regardless of
their age.
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