Tax Deductions for the Home-Based Sole Proprietor
By Ginger Derrickson
Tax time is here again! What do you need to know about tax
deductions when doing business as a home-based sole proprietor?
You may be thinking, "I'll hire an accountant or go to one of
those tax preparation kiosks in the mall," or "I'll just use one
of those computerized tax software programs."
Whatever your decision, 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.
But the most compelling reason: Getting the greatest benefit
from your deductions.
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!
Let's start with the basics:
* Advertising costs
* Basic Office Supplies (paper clips, pens, pencils, paper,
toner/ink cartridges for printer, etc.)
* Telephone (* see expanded discussion below)
* Bank Fees
* Business Insurance (insurance related specifically to
operation of your business)
* Business Equipment (* see expanded discussion below)
* Internet Fees (if used in the course of your day-to-day
* Books/Subscription Fees
* Vehicle Expenses (* see expanded discussion below)
* Home Office Expenses (* see expanded discussion below)
* Legal and professional services
* Taxes and licenses
* Meals and Entertainment (* see IRS Publication 463)
* Tax preparation (* see expanded discussion below)
The list above is based on Schedule C of IRS form 1040. Be sure
to look over Schedule C when you are setting up your books for
tracking expenses ("Bookkeeping Simplified!" - Administrative
Solutions, February 1, 2000.). Schedule C will help you
determine what you should be tracking. If something is not
listed as a category you need, then you list it separately
under "Other Expenses."
This next section is an expanded discussion on selected items
from the above list. These are often unknown or overlooked
= Business Equipment =
Did you know that you are allowed up to $19,000 deduction for
listed property this year? It is called THE SECTION 179
DEDUCTION. It lets you deduct the entire purchase price of
business equipment the year you put it into service.
The term listed property according to the IRS applies to items
that are generally used for entertainment or recreation, but may
be used for business as well, such as computers, cell phones,
cars and video cameras.
Of course this assumes that the listed property is used 100% for
business. If it is used for business more than 50% of the time,
then you may deduct the corresponding price, up to the limit.
"Yikes!! But my computer is used by my family, what do I do
now?" You will need to keep a log of its usage. Place a pad of
paper and a pen next to the computer and ask all who use it to
write down the time when they start/stop using the computer.
You do likewise for your business time, this way you will
be able to prove that the computer was used 50% or more for
business use. You must also place the computer in a room other
than your home office or the non-business use will violate your
home office's requirements of exclusive business use.
This applies to all listed property. Keep a log showing both
business and non-business use.
The total limit on Section 179 deductions will continue to
increase through 2003, when it tops off at $25,000.
= Company phone =
Do you have phone lines separate from your home phone? You
should! It makes it easier to deduct phone expenses, makes the
bookkeeping simpler too! If you decide that you only want one
phone line, you can deduct all business related long distance
calls and any special services such as call waiting, but you can
not deduct the basic cost of the phone service.
= Mileage =
Do you take the standard mileage deduction rather than
amortizing car expenses? Be careful on your 1999 taxes!
Effective April 1, 1999, the IRS lowered the mileage deduction
from 32.5 cents per mile to 31 cents per mile. Then when gas
prices began to creep up again, they raised it to 32.5 per mile
in 2000. For 1999 you need to make a distinction between
mileage from January 1, 1999 to March 31, 1999 for 32.5 per mile
and from April 1, 1999 to December 31, 1999 for 31 cents per
= Health Insurance =
Did you know that health insurance deductions keep increasing?
You can deduct 60% in 1999 of your health insurance payments for
yourself, your spouse and your dependents. If you itemize
personal deductions, the remaining 40% can be itemized on
Schedule A. This applies only to health insurance that you
purchased as an individual. If you are still paying an employer
for your health insurance (yours or your spouse's) you are not
eligible for this deduction.
= Tax Preparation =
Since you are a sole proprietor the preparation of your taxes
can be more complicated. If you choose to have someone prepare
your taxes, then be sure to ask them for an itemized bill. The
cost of preparing all business related paperwork is deductible.
= Home Office deductions =
This is the one deduction that is really tricky! The IRS says
that in order to deduct any expenses related to having a home
office the area MUST BE USED EXCLUSIVELY AND REGULARLY FOR
MANAGING YOUR BUSINESS! The good news is that for 1999 they have
expanded this definition to include something as simple as a
counter top or a desk, IF you use it exclusively and regularly
for business. This now includes those previously excluded from
claiming a home office deduction - such as consultants,
salespeople, and even doctors who use a home office to manage a
practice - they can now claim that space! Once you have
determined that is it exclusively and regularly used for
managing your business, what can you deduct and how much?
You can deduct a percentage of the total cost for rent,
utilities, insurance, repairs and trash collection from your
business income. If you own your home you can even claim a
portion of the depreciation in value.
How do you figure what percentage to use? You calculate the
percentage of your home office to the total size of your
home/apartment. You can be exact by measuring square feet or
you can count rooms. Then use that number to figure the dollar
value of each deduction. The dollar value is the total amount
you have paid for allowable deductions during the year,
multiplied by your home office percentage. The resulting sum
will give you your total deduction.
For more information or details relating to filing taxes as a
sole proprietor, the following web sites will help:
For an in depth discussion of all business related expenses for
a sole proprietor read IRS publication 334, Business Expenses
for the Sole Proprietor. (All IRS publications referenced in
this article are available for download at the IRS web site
Tax time may not be enjoyable, but with a little knowledge you
can get the most from your deductions!
Ginger Derrickson, CPVA - Assisting You Virtually
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