Mary Kay, Lia Sophia, Silpada, 5Linx, Pampered Chef to name a few… These are just a few of the independent consultants in the world of work. Many of them are sole proprietors who have little to no understanding of the tax implications associated with this, the tax deductions available to them, or what they need to do to file taxes.
It is extremely important not to mix deductible expenses with personal expenses. Opening a business bank account will help keep expenses separate. This should be one of the first things on the “to do” list when starting a business. Special tax treatment applies to start-up expenses: expenses incurred before opening the business. Therefore, these receipts should be kept separate from general operating expense receipts.
One type of deduction that helps reduce overall tax liability is the auto expense deduction. Automobile expenses are deductible using either the standard mileage rate or actual expenses. The standard mileage rate is the easiest method, as you simply multiply the current rate ($.555 for 2012) by the total number of miles. When using the standard mileage rate, a mileage record must be submitted in the event of an audit to substantiate the deduction. The actual expense method requires you to keep detailed records that reflect the actual cost of related expenses, such as gas, oil, insurance, repairs, maintenance, licenses, car washes, and depreciation. If you use a vehicle for both business and personal purposes, the expenses will need to be divided accordingly.
While most business owners are aware of the meals and entertainment deduction, they should be careful to keep accurate records when claiming deductions for these expenses. Records should contain the date of the meal or event, the name of the person you met with, and the topic of conversation when possible. Meals consumed in the daily course of business are not deductible. However, generally 50% of the cost of meals eaten when traveling for business purposes can be used to reduce taxable income.
The IRS allows a home-based business deduction for self-employed taxpayers if they meet certain requirements. The dwelling must have a habitual and exclusive use for the business. By taking advantage of home-based business deductions, a percentage of other household-related expenses can also be deducted. The amount of deductible expenses is subject to specific limitations and statutory provisions. Consult a tax professional for guidance.
This article contains general tax information for taxpayers. Every tax situation can be different, so don’t rely on this information as your only source of authority. Seek professional advice for all tax situations. Tax professionals are experts who stay up to date on changes in tax law. They can save you time and provide information on how to use the tax breaks available to you.
