From: Detroit, MI
Dear TaxMama,
Dear taxmama, what a wonderful job you doing.
Thank you very much.
I have searched through the entire archives of past questions looking for
a place you may have addressed tax tips for people that are employed by others,
but do own a business part-time at home.
Example, If I am employed at Walmart, but I own a small business at home,
could you, please address this situation relative to taxes, losses, and deductions.
Oh, I am home renter. You website did touch home renters with home business,
but not if they are employed by someone else.
Also, my other question is how is tax treated if I run a loss in the business?
Are there any "MINIMUM" taxes that I must pay?
Your answer will help me out and many more people.
Thanks,
Michael
Hi Michael,
Well, if you're going to be that sweet, how can I refuse to help?
You know, I sit here working and take so much for granted. Your question
makes it clear that some things that seem obvious to me after being buried
in taxes, are completely bewildering to non-tax professionals.
So, your question is a good one.
When you have a traditional job, especially one that doesn't include much,
if anything, involving job-related expenses, it's pretty simple to account
for your business tax issues.
Ideally, if you're serious about the business, I'd suggest that you set
up a separate checking account and credit card to clearly separate your personal
and business income and expenses.
When you run a business with a profit motive, working from home, your overhead
is lower than if you have an office or storefront. When you're serious about
this being a business, not a hobby, you're apt to show a profit within the
first year or two. So, your question about how to handle a loss only affects
your first couple of tax returns.
In general, when your business shows a loss, and you have income from a
job, the wages will absorb your business losses. The nice thing about having
a loss, is that you have no alternative minimum tax (ATM) surprises. Or at
least, not based on your business' contribution to your taxable income.
In fact. having a loss on your Schedule C - Business Profit and Loss Schedule,
will reduce your adjusted gross income (AGI - the number on bottom of page
1 of your personal income tax return). So, if you were facing that nasty ATM
tax, this might bring your income down enough to pull you out of minimum tax
status.
Now, what happens when you have an office in home and you're renting? It's
really kind of cool. It's even better than the situation for people who own
a home. When you're renting, you can deduct a portion of your rent, utilities,
insurance and other maintenance - with no future repercussions. (Owners have
to pay back depreciation when they sell the house.)
More
info here.
You'll be using Form
8829 -Office in Home
Read the instructions
to Form 8829. You're going to find them very illuminating.
Chapter 7 of Small Business Taxes Made Easy will walk you through all the
best ways to identify ALL the spaces you're using for business. (Often, there
are more than you realize.) And it will help you with the calculation of your
office in home deductions.
But don't keep running at a loss. Chapter 2 will explain exactly why that's
so dangerous - and how to avoid having losses. You'll find some really solid
tools to help you create a business plan that will not only satisfy IRS, but
ensure that your business makes money for you.
As to some of the other things you'll need to know about state and local
tax issues that affect you, Chapter 1 has a complete checklist of all the
different agencies you need to contact - and some great resources for services
you need.
Now, don't think I am trying to push the
book. But, since it IS under $15, including shipping at Amazon.com and
WalMart.com - you've got nothing to lose by ordering
your own copy and carrying it around with you and making notes all over
it.
Hey, if you really DO work for WalMart, maybe they'll give you even more
of a discount, eh?
Look, there's a lot of information out there about how to take advantage
of the home-based tax rules just to cut your taxes. IRS is wise to that scam.
But, no one objects to a real business, with real expectations of it being
profitable - even if it takes a few years for the profits to start.
Listen to this
no-cost teleconference about tax tips while you're waiting for the book
to arrive, listen to this discussion about bookkeeping and organization
tools for a business like yours
Good luck! Do it right!
Best Wishes,
Eva Rosenberg, MBA, EA
