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Wednesday, April 2, 2014

After I completed my taxes this year, I want to kick myself!

About 5 years ago,  I had a successful virtual assistant business with over 30 re-occurring clients. It was a lot of work, but it was great.  In 2008, one of my top clients decided that they wanted me to work with them exclusively and was willing to pay the high bill to have such a privilege.   That was even greater!  So, I essentially closed my business and became and independent contractor. The work was challenging and interesting, my work hours were flexible and I was well paid. 

Then 2009 happened, my major client was a financial services agency. You all know what happened to businesses in the financial sector in 2009, right? Sad day for me.

Then the housing bust happened which affected my landlord's finances, but allowed my husband and I  the chance to purchase the house we were renting (it is a really nice house guys).  To top if off, my sister (who was living with us at the time) was diagnosed with stage-4 cancer. Everything was falling apart, and everything was whirling like a whirlwind at the same time.

Business was slow and new clients were few and far between. The bank said they were not accepting anymore 1099 income statements (that means independent contractors, people) with loan applications.  Unfortunately, that's all I had to show my income or lack thereof.  With a major illness, my sister did not need to be moved to a new house at this critical time.  So, I did what I had to do.  I got a regular, commuter job that issued a W-2.  

It was the solution to everything.  Our income statements satisfied the bank, the loan came through, we bought the house, we didn't have to move my sister at a critical time in her life, and the kids could stay in the schools they loved. 

However, I could not see myself (operative words here) working 8+ hours a day, commuting 2 hours round trip, taking care of a home with children and a sick relative AND maintaining--even part-time--my home business.  So I closed shop.

BIG MISTAKE!

The next year, my husband and I owed thousands of dollars to the IRS!  We had never owed that much money to the IRS before.  We were flabbergasted! But as we completed our 1040, we realized that our true financial savior was the Schedule C.

Let me tell you why:
Owning a business can really help your household's budget bottom line.  The expenses and deductions from your business are amazing, they are huge.  

 Here are the items you can deduct if you own a legitimate business:


  • Office Supplies
  • Office Equipment
  • Other Equipment you need for your work
  • Software
  • Publications and Books
  • Postage
  • Business License
  • Mileage
  • Travel (get a nice hotel room because you can deduct 100% of that)
  • Costs while on the road (dry cleaning, tipping, rental cars)
  • 50% of eating out while traveling
  • Insurance premiums (if your spouse and children work for you and are covered by your insurance it's tax deductible)
  • Retirement contributions
  • Half of Self-Employment tax (*You have to pay 15.3% of net profits to Social Security - but you can deduct half this amount on your taxes!)
  • Phone charges
  • But the Pièce de résistance is the Home Office Deduction
The Home Office Deduction:
If you can prove that you have a dedicated space just for business in your home, you can take that space, calculate the percentage it takes up of your home and deduct expenses.  

I don't think you heard me.  Let me give you a "for instance".  Let's look at my case.  I am very blessed.  I have an entire room that is devoted to my home office.  Anyone (which would mean an IRS agent, business inspector, etc.) walking into this room would know immediately that this room is devoted to being my home office.  They would know this simply because there is nothing but home office stuff in there: Desks, computers, printers, books, paper and more paper, office supplies.  There are no beds, no sofas, no TVs - nothing that says "here we relax and entertain friends." 

Now, my husband and I measured the area of our office against the appraised square footage of our home. The IRS estimates our office takes up 7% of our home.  Which means . . . check this . . . we can deduct 7% of our costs to run our home.

(These are example numbers, not the real ones -- I just made them up for easy calculation)

Heating for the year?  Why that's $2,000.  $2,000 x 7% = $140 deduction.  What?!

Alarm Service?  That's $1200.  $1,200 x 7% = $84 deduction.  Stop!

Home Repairs? Receipts total  $7,000.  $7,000 x 7% = $490 deduction.  Get out'a here!

Put window coverings up throughout the whole house?  Well, the window coverings in the office need a separate receipt because that's fully deductible! Boom!

Are you starting to see the advantages of having a legitimate home business?  Let me stress legitimate.  

Well, what is legitimate?  I'm glad you asked.

A business that you are working hard to gain a profit in.  If you can show that you are working hard to gain a profit in your business, that you actively seek clients and customers, engage in promotion of your business, work to acquire income from your business - even if you do this just one hour out of your day. . . then you are legit.  

The list of deductions I provided above for the home office, is only the beginning.  There are so many more deductions that you take when you own a home or small business.  For more on this, simply go to the IRS's webpage. IRS Home Office Deduction Sheet. Or talk to a tax professional, it will be worth your time and money to do so.  Really.

I closed my business and went all W-2.  I regret it.  

Having a regular W-2 income, being an employee really sucks! (Sorry, to all you guys contented with employee status. I'm sure it works for you -- but, it doesn't for me.)  It sucks so much that I have relented and I'm back in business again. 

Learn from me everyone.  If you've always wanted to be your own boss and start a business.  Do it!  Do it now!!!

If you have a business and for whatever reason, you are thinking of quitting and closing shop -- DON'T! 

Stay powerful and influential my friends.

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2 comments:

  1. Great article as usual. I have benefited from Schedule C for about 6 years now. One thing I want to add is that your office space doesn't have to be a whole office/room. It just has to be a space dedicated to operating your business. Like someone who does hair in their living room, it would be that space dedicated to doing hair.

    ReplyDelete
  2. Good add, Mishanne. Thank you for clarifying that - that's a very important point.

    ReplyDelete

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