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Did you know that whether or not you make cookies and cakes to sell to relatives and friends or make baby clothes or furniture to resell at craft shows that you have income that needs to be reported on your income tax return?
One of the first things you need to determine as you are starting this business is whether it is a hobby or a business venture entered into for profit. Several factors to help you make this decision are; are you doing this for enjoyment or do you intend to make a profit? Do you keep records in a business like manner and have a separate checking account? Do you advertise and promote your business and do you research or take necessary action to make this profitable if it is not. If you can truthfully answer yes to the above questions then you probably have a viable business; if not then you probably have a hobby. The difference is very important as it concerns the way either one is reported on you Form 1040.
In the case of a hobby, the gross income is reported on the other income line on the front page of the tax return. The costs and expenses are reported as miscellaneous itemized deductions on Schedule A subject to the 2 percent floor.
Record keeping is very important in either situation. Let me give you some helpful hints in regards to a home based business. You should keep a separate set of books to maintain the transactions in your business. There are a variety of programs out there ranging from Microsoft Money and
Quicken to
Simply or
Peachtree Accounting Systems. It is also possible to use a spread sheet like Microsoft
Excel but this does not give you as much detail.
My first suggestion would be to open up a separate checking account. This will give the indication that you are serious about keeping track of income and expenses. I would also suggest that you have a small zippered case to keep your cash receipts in. You will be amazed how much you spend just on little items once you start keeping track. The other item I would recommend is some type of filing box or milk crate. They work well for keeping records in.
INCOME
Keep track and record all income items. Depending on the type of business the categories vary. You may have sales from item made or purchased for resale. You may have commissions from direct sales as well as override commissions. Record each type of income separately and keep the appropriate documentation.
EXPENSES
It is very important to keep detailed expense records as well as there appropriate documentation. Some of the different categories you may are as follows but not limited to:
Vehicle Expense The easiest method for expensing vehicle usage is to use the standard mileage deduction. Just remember that you must keep a mileage log of business mile usage and multiply the total mileage by the appropriate rate. For 2003 that amount is 36 cents per mile. You can also keep track of actual expenses but to do that properly the total expense which consist of; insurance maintenance, gasoline, etc must be prorated between business and personal use.
Supplies These would consist of pens, pencils, paper, tape etc.
Entertainment Consists of meals and/or snacks at restaurants or meeting clients/customers at home, sporting and concert events. Remember to write who you were with and the purpose of the meeting.
Telephone If you have an office in your home, keep a log of the long distance calls you make that are business related. The monthly charge for the first telephone line at home is not deductible, however is you have a dedicated line for you business that is.
License Fees If you are in a business that requires licensing, the initial fees and renewal amounts are fully deductible.
Seminars, meeting & Conventions These expenses include tickets for the event, transportation including airfare, hotel and meals. Remember if you take your spouse to these events their expenses must be kept track of separately as they are not deductible.
Rent If you maintain a storefront, office or just a spot at flea markets and craft shows, this is a deductible expense. Leases for equipment such as mailing machines and computer and office equipment are considered rents as well.
Postage & Shipping Includes stamps, certified mailing, UPS and freight if you have any.
Office Expenses If you maintain a separate storefront this would include utilities, cleaning, etc. If you maintain an office in the home that is a different subject all together. To be eligible for that it must be a room dedicated to your business and necessary because you do not have a separate location. Mortgage interest and property taxes are pro rated and deducted. Other expenses such as utilities, insurance, maintenance are deductible but must be pro rated as to the percentage of office space to total home space.
Advertising Business Cards, yellow page listings, flyers, brochure, website expense, media advertising.
Subscriptions & Dues Professional magazines or those directly related to your business, memberships to professional or charitable organizations.
Business related gifts birthday, weddings, flowers, promotions, The maximum amount deductible here is $25.00 per person per year.
Professional Fees Lawyers and accountants
Maintenance This includes repairs to equipment or building if you rent or your home if it is directly necessary to carry on your business.
Most expenses that are directly related and necessary to carrying on your business are deductible. Please note that clothing that can be worn in public as well as cleaning expenses of same are not a deductible expense.
For more information please read the following publications available from IRS:
Pub 552 Recordkeeping for individuals
Pub 583 Taxpayers starting a business
Pub 910 Guide to free tax services
Pub 463 Travel, entertainment and gift expenses
Pub 334 Tax guide for Small Businesses
Pub 535 Business Expenses
Pub 917 Business use of a car
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