income tax reduction guide · to the average person in mlm, or networking, this is what they were...

Income Tax Reduction Guide ©2012,2013,2014,2015,2016,2017,2018,2019

INCOME TAX REDUCTION GUIDE

For

HOME BASED BUSINESS ENTREPRENEURS

By Steven Spangenberg Home Based Business Tax Expert

http://www.Do-My-Taxes.com [email protected]

717-889-8418


BEFORE YOU START

Many clients come to me at tax time and state, “I’m in a business”! They hand me a piece of notebook paper with some items written on it and say “These are my deductions and these are my sales”. Sounds easy, right? To the average person in MLM, or networking, this is what they were taught to do, usually by their upline. However, their upline cannot save them from the IRS. It’s easy to get in business today. Sign an application, get some business cards, buy some product and off you go. Not so fast! Are you really in business? Unfortunately, the IRS is the one to determine that. So with that in mind, read the following carefully before you start.

ARE YOU IN BUSINESS?

Be careful when someone states “this is a great tax write-off”! The IRS frowns at that. What people should be stating is that this is a great business to earn money and it also entitles you to some additional tax deductions. The IRS looks at several factors when determining if YOU are in business. (Be careful, the IRS is not limited to just these factors.)

Intent-Is it your intent to profit from the business activity?

How do you establish intent? If your business shows a profit, it is doubtful that you need to ever prove it. However, if you show a loss (as most 1st year networkers do) or have expenses that are disproportionateto your income, you will need proof.


The best way to show intent is to have a WRITTEN business plan. Most networkers are introduced to goal setting. Most never write down their goals. A business plan is nothing more than a large-scale goal sheet. The fact that it is written, provides proof that the person is serious about the business and intends to be profitable. Your business plan should include items such as:

*Your mission statement.*Your start date.*Overview of your marketing strategy.*Estimated start up costs.*Projected retail sales.*Projected marketing costs.*Projected recruitment information.

Business plans are meant to be flexible and updated. Always keep it “live”.

Activity-Is your time spent doing business consistent & substantial in order to create profit?

Have you heard the saying “Get rich by working 10-12 hours per week? Most networking companies use it in their presentations. Can you really do that? Yes & no, depending on the company & the compensation plan. Talk to other people in your business. Find a mentor. Most of all, document these items, either in a journal or in a date planner. Whatever it takes to meet your profit goal, do this consistently and have it documented in your business plan and your planner.


For example, you have determined that in order to be successful, you need to attend a minimum of two weekly meetings, one monthly seminar, and two national events.

Document that in your business plan and write the events in your planner. Retain notes from meetings and schedules from seminars & conventions as proof of attendance.

Record keeping- Do you keep appropriate business records?

While you need not set up a full blown, elaborate accounting system, you do need to do certain things to satisfy the IRS. These items are self explanatory.

*Keep a separate bank account.*Maintain a filing system for paid invoices.*Maintain a tax diary (or planner)-track dates/times/events.*Maintain a mileage log.*Send correspondence on your company letterhead.

All of the above items are not all inclusive. This is not meant to be a comprehensive list, however, if you do all of these items, you are 99% there.

Once you have the foundation laid for your business, you are now ready to take advantage of the many tax benefits available to MLM. Good luck and I hope you are prosperous!


WHAT ARE DEDUCTIONS?

You may deduct any expenses that are ordinary and necessary in carrying on any trade or business.

The problem is who decides what is ordinary and necessary.

The general rule I have ascribed to is this:

“Will spending this money help further my business and/or generate profit?”

If it does, I deduct it. However, I am sure to document HOW it helped my business. Some common examples:

Deduction Benefit

Seminar expense Obtain knowledge to help grow my business.

Advertising Obtain new business.

Business cards Necessary to give to clients & contacts.

Some not so common examples:

Gifts to family/friends Helps get your product noticed. You may obtain regular customers.

Driver’s license fee Can be totaled with auto expenses and deducted using the “actual” method.

Checking account fees on business acct. You need to maintain a separate account for business.

Babysitting fees If you are going to a seminar and you need childcare, you can deduct it. See seminars above.

Once again, the more you document your deductions, the better you will be in the long run. The next page gives examples of business deductions that are possible. This list does not include every deduction, but will give you a great starting point.


COMMON DEDUCTIONS

Accounting fees Advertising Amortization Attorney Fees

Auto expenses Bad debts Board Meetings Bonuses to employees

Bookkeeping Business Taxes Collection Expenses Contributions

Conventions Depreciation Dues Education

Entertainment Equipment Exhibits/Displays Freight Charges

Gifts Health Insurance Heating Insurance

Interest Inventory Loss License Fees Meals

Memberships Magazines Moving Newspapers

Office supplies Office rent Postage Real Estate Taxes

Rents Safe Deposit Box Storage rental Samples

Selling expenses Supplies Telephone

Some expenses may have limitations (such as entertainment) be sure to evaluate each expense based on its own merits.


AUTOMOBILE DEDUCTIONS

BASIC RULE: The IRS allows you to compute this deduction two ways, either by the “mileage” method or the “actual” method.

Mileage Method

**You can deduct the actual business miles driven multiplied by 55 cents per mile (2018 – blended rate). This rate may change from year to year.

Actual Method

**You deduct your actual expenses multiplied by your business percentage.

Actual Expenses Include:

Gasoline Repairs Depreciation Interest

Insurance Oil Changes Tags & License Car Washes

Inspection Tires

Your business percentage is figured by dividing your business mileage by your total mileage.

With only using one vehicle for business, it usually is more advantageous to use the mileage method.

CAUTION: You must be consistent in your method. You may switch from themileage method to the actual, but not visa versa. Once you chose the actual method, you must stay with it.


STRATEGIES TO INCREASE YOUR DEDUCTIONS

#1-Identify supplies and equipment used to maintain your business car.

LOGIC: Every little bit adds up! You would be surprised how much you DO spend maintaining your car.

EXAMPLES: Jumper cables cleaners battery charger

Tire pump small tools car wash & car wax

Washer fluid hose washer fluid

If you really calculated all these items in a years’ time, it could affect your deduction.

#2- Make EVERY mile count.

Logic: Every time you get in your car, think about how to make that trip deductible.

It is obvious that when you are doing strictly business, it’s deductible. However, think about this. How many times do you drive:

To the movies To the grocery store To the doctors office To your friend’s house To your relative’s house To your vacation house To the post office To the bank To the park Or….just anywhere????


COMMUTING MILEAGE

You can deduct commuting mileage based on the IRS’s “Two Business Location Rule” (IRS Revenue Rulings 55-109 and 99-7, and 1955-1 C.B. 261)

You have to meet the IRS’s criteria in order to deduct the mileage. They are:

1.) Actively engage in your home-business 2.) Drive to a “necessary business stop” on the way to your job. 3.) Drive to your “second place of business” (your job) 4.) Then do the same on the way home.

Before you go to work in the morning, perform and ordinary and necessary business function. Place a call, respond to email or address a letter.

On the way to your job, stop at the bank or post office. You can also deliver a product or meet a business contact.

You do not have to write off every day. But take your commute and multiply it by 36 cents. It adds up. This also gets you in the habit of having consistent business activity.

You cannot speak to a co-worker about your business and have the mileage count. This has been confirmed by the courts. However, I would say if you are delivering merchandise to a co-worker, meet them in the parking lot BEFORE work in order to satisfy step #2.

DOCUMENTATION:

Document your activity in your date book.

Document that you plan to have this type of activity in your Business Plan.


TRAVEL EXPENSES

DEFINITION OF TRAVEL: When you are away from home, overnight, or for a period of time sufficient to require sleep.

Example: You live in Harrisburg, PA, fly to Virginia Beach in the morning and return that evening. You are not “traveling”. You were not away from home overnight.

You are allowed to deduct only the “transportation” costs of that trip.

TYPES OF COSTS: There are two types of travel costs:

Transportation – Costs you incur to get to & from your destination.

On-the-road – they include lodging, meals, laundry, dry cleaning, and similar expenses.

You are allowed to deduct 100% of travel costs except for travel meals, which are deducted at 50%.

WHAT IS A BUSINESS DAY?

If you spend the majority of the working hours pursuing your business (generally, four hours and one minute), that day is counted as a business day. If you are prevented from engaging in the conduct of your business due to circumstances beyond your control, that day is still counted as a business day even if you spend the day at the beach.

Travel days count as business days provided that the travel is by reasonably direct route to the business destination and does not involve substantial non-business diversions.


BENEFITS of a BUSINESS DAY:

You can deduct your on the road expenses You have a day counted toward the “business trip” test

RECEIPT RULE: No receipts are required for travel expenses under $75.00 per expense. The only exception is for lodging. You must have a receipt for any lodging regardless of the amount.

TAX TIP: Drive 300 miles a day toward your business destination.

The Federal government reimburses IRS employees a full day’s per diem for each 300 miles of travel. Take advantage of this rule. Plan your trips to cover 300 miles in a day to your business destination. Each day will count as a full business day and allow you to deduct your on the road expenses for the day.

DOCUMENTATION: Be sure to keep good notes in your tax diary for the actual miles driven & related expenses.

TAX TIP: Deduct dirty clothes

On the road expenses include dirty clothes that were soiled while on a business trip. You can get them laundered while on the trip or a within a reasonable amount of time after the trip.


TAX TIP: Combining business with pleasure

Example: If you travel to the beach with your family and also do business while there, you can deduct certain expenses depending on the number of business days vs. personal days.

RULES:

Transportation Expenses:

???Were more than 50% of days, including travel days, spent on business?

YES- Deduct 100% of transportation expenses to & from business destination.

NO- No deduction for transportation expenses.

On the road expenses:

???For each day: Did you conduct business at least 4 hours & 1 minute?

YES- Deduct 100% of on the road expenses for each day.

NO- No deduction allowed.

CAUTION : You may only deduct on the road expenses & lodging for yourself, not your family.

Example: If a single rate hotel room costs $40 & the family paid $75, you can only deduct the $40.


TRAVEL (cont.)

DOCUMENTATION:

Keep proper receipts:

All receipts for lodging are required.

Receipts for all expenses of $75.00 or more

Write it down & have it organized:

Separate transportation costs from on the road expenses.

Document each day & classify a business or personal.

Keep a log showing:

The amount spent on each expense.

The dates of departure & return.

Where you traveled noting cities, states, hotels & destinations.

Why you traveled including the business reason & any benefits from taking the trip.


MEALS EXPENSES

We all “eat out” with friends, family & business associates.

TAX TIP: The objective is to always have a business intent while you dine out with anybody EXCEPT your spouse.

RECEIPT RULE: NO receipts are required for meals under $75.00.

RULE: You must “discuss” business before, during, or after a business meal to qualify for a business meal deduction.

The tax law requires that a business meal be arranged for the purpose of conducting specific business.

DOCUMENTATION: You must answer the questions, “who, where, and why for each event and record them in your tax diary within 24 hours after the event.


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HIRE YOUR CHILDREN

RULES:

You must be set up as a sole proprietorship Your child must be between 7 & 17 years of age

HOW TO:

Require a weekly time sheet. Set your child’s salary within reason for the duties performed Pay them by check Have them deposit the check into an account with their name File the proper IRS forms (W-2)

BENEFITS:

You can pass up to $12,000 per year to each child TAX FREE.

(Some state taxes may apply)

You generate a TAX SAVINGS of up to 30.3% on each dollar paid. That is up to $3,636 per year per child!

You use the money you pay your child to pay for:

College Weddings & School Clothes Toys & Parties Vacations Braces

This strategy will get UNCLE SAM to pay for your children’s expenses!!


HOME OFFICE DEDUCTION

This area is both lucrative & dangerous.

The IRS has been looking carefully at deductions taken. The reason for this is that many people abuse this deduction. If you follow the rules and have good documentation, there is no worry!

RULES:

The law states that a home office deduction is available only to the extent that a portion of the dwelling is used exclusively and on a regular basis as:

The principal place of business. A place of business which is used by patients, clients or customers in meeting or

dealing with the taxpayer in the normal course of business.

Other items that qualify for a home office deduction:

A portion of a room may also qualify for a home office. A room where products or inventory is stored qualifies. The office is used to conduct administrative or management activities of your

business AND there is no other office where you conduct these activities. Ex: Sales people/individual cleaning companies/consultants.


HOW TO:

There are two methods that are acceptable to figure your deduction:

Square footage Number of rooms

Square Footage:

Total sq footage of office space (or area) 300sq ft

Total Sq footage of house 1,200 sq ft

Percentage used to figure office deduction 25%

Number of rooms:

Rooms used for business 1 room

Total rooms in the house 7 rooms

Percentage used to figure office deduction 14.2%

This method should only be used if all rooms are of similar size. Also, you do not count bathrooms or unfinished basements.

CAUTION: You MUST be consistent in your method. You cannot flip back and forth between methods.


WHAT EXPENSES QUALIFY:

100% deduction:

Items that DIRECTLY benefit your home office are 100% deductible. Items such as:

1.) Office supplies 2.) Computer equipment 3.) Fax

4.) Telephone equipment 5.) Paper/pens etc 6.) Desks

7.) Lamps 8.) Chairs 9.) Files

10.) Bookshelves 11.) Caller ID box 12.) Décor

These items will be placed on your Schedule C deduction page. Not on the for 8829 (Home office Deductions)

Percentage deduction:

Items that indirectly benefit your home office are deducted based on your percentage figured for your home office space. They fall into 2 sub categories; 1.) no limits 2.) limits.

No Limits – These items are fully deductible regardless of income or loss shown BEFORE these deductions. They are:

Home Mortgage Interest Real Estate Taxes

Limits – These items are deductible to the extent that they do not increase a loss or create a loss for your business. They are:

1.) Home Insurance 2.) Repairs/Maint 3.) Utilities 4.) Mortgage Insurance 5.) Rent 6.) Sewer 7.) Minor landscaping 8.) Depreciation

The excess deductions can be carried forward to next year’s return


DOCUMENTATION:

Because the home office deductions are carefully watched, it is crucial that you keep very detailed records of your deductions. Helpful hints are:

Photograph your home office.

Record the square footage in detail in your tax records.

Obtain receipts for ALL items in your home office.

Obtain receipts for all “home” expenses (utilities/maintenance etc).

This deduction is a great help for people who do not have enough deductions to itemize. They can recapture some money by deducting their interest & taxes through a home office.

Most of all the deductions taken are dollars that you will spend with or without a home office.

The home office has been referred to as “the last great tax shelter” left for the average person. So take advantage of it!


HOME OFFICE DEDUCTIONS

The following items are items that are found within your home office. The deductions are taken on the appropriate line on your Schedule C:

1.) Office supplies 2.) Computer equipment 3.) Fax

4.) Telephone equipment 5.) Paper/pens etc 6.) Desks

7.) Lamps 8.) Chairs 9.) Files

10.) Bookshelves 11.) Caller ID box 12.) Décor

13.) Plants 14.) Area rugs 15.) Shelves

The following is a list that would appear on Form 8829 – “Expenses for Business Use of Your Home”:

Line 17 – Insurance:

1. Home Owner’s Insurance2. Private Mortgage Insurance3. Renters Insurance

Business Liability Insurance/Extra Premiums for Business Equipment is a 100% deduction and placed on Schedule C.

Home owner’s insurance is usually escrowed in your mortgage payment. You can find the amount on your form 1098 - Mortgage Interest.


Line 18 – Repairs & Maintenance: 1. Minor landscaping2. Flowers/shrubs/plants3. Swing Sets (for visiting consultants kids too!)4. Mail Box/Post5. Driveway sealer/gravel6. Snow shoveling7. Grass Cutting8. Lawn Mower/gas/repairs9. Grill – You must have business cookouts (document them!)10. Trash/Garbage Bill11. Deck repairs12. Grass seed/lawn maintenance13. Cleaning supplies14. Outdoor repairs15. Household tools16. Vacuum cleaner/bags17. Trash bags/trash cans18. Repair supplies: paint/spackling/rags/etc19. Repairs to toilet20. Rug cleaning21. Drapery cleaning22. Door knobs23. Brooms/mops/dustpans24. Light Bulbs

Line 19 – Utilities:

1. Gas2. Electric3. Oil4. Sewer/Water

Note: No telephone expense goes here!

Line 20 – Other Expenses:

1. RENT2. Items placed in your home for decorating purposes3. Others that do not fit in the above categories

income tax reduction guide · to the average person in mlm, or networking, this is what they were...

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