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Tax Issues and the Home Based Business

Tax Issues and the Home Based Business

A Home Business Article Contributed by Teresa Phillips

Does a Home Based Business Come under the Tax Net

Any Home Based Business is liable to tax just like any other business. It is important for these tax purposes that proper records be maintained of the money transactions so that in the unlikely event of an audit you have all the documents ready and receipts maintained as proof of accounting transactions carried out during the financial year.

Ways to Reduce the Amount of Tax You Pay on Your Home Based Business

An entrepreneur new to the home based business scenario needs to educate himself on all the possibilities of deduction in taxes so that he does not pay more than he strictly needs to. For example, if you have a vehicle that you use for business related purposes then you can claim tax deductions to the amount of mileage used for promoting or running the business activity.

Not only that, other costs like insurance for that vehicle, cost of parking facilities etc can be written off if you are using the vehicle for business related activities. If, family members are employed to help in running the business, then salaries paid to them are exempt from taxation. It is a good idea to maintain a separate business account from where all monetary transactions including paying of salaries can be carried out.

The home based business will obviously be operated out of some part of your house, which will be your designated business area. The cost of this space can be written off, to illustrate this point a little, let us assume that you pay a rent of $1000 per month on your house. If the space from where you operate your business is roughly 20% of the total house area, then you are entitled to a deduction of $200 per month from the taxes that you pay.

Similarly, you can claim tax exemption on the utilities that are meant for your business use, be it water, electricity or telephone. Equipment like notebooks, ledgers, all kinds of stationery, printer, scanner, computer, cell phone etc can all be safely deducted from the final tax amount that you pay.

Invest a Little to Keep Track of Your Home Based Business Transactions

Keeping track of the financial records of your home based business and maintaining receipts can become a chore sometimes but it is an unavoidable activity. It is important to get into a routine from the beginning itself so that when your home based business grows, you have a system already in place.

Having a system in place is also important because it will let you know the expenses that you are incurring to run your home based business and the break up of expenses, so that in case you need to choose between spending on a press ad or placing an ad on the web, you can consult your records and arrive at a decision. This data collected over a period of time can help you plan your budget in a more effective way. It is also an indicator of how successfully the expenses are being managed in the home based business.

Purchasing accounting software can be a good long-term investment. There are many inexpensive softwares available which are user friendly and definitely a better option than hiring an accountant to do your work which will only add to your company expenses.

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Tax Issues and the Home Based Business

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