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Dear WAHS Leslie,
I am researching starting a MLM business and often hear of
the tax benefits. Can you summarize for a marketing
business where I would not be stocking products, what some
of these tax advantages are? How about travel? Thanks,
Julie from DC
Hi Julie,
This is a great question as many people fail to realize
the great tax advantages available in home business. In
his book, Multiple Streams of Income, Robert G. Allen
reports that you can get an immediate return on your money
in a home business. If you're in the 30% tax bracket,
every dollar that is categorized as a tax deduction give
you a 30% return on your money. Now where else can you see
that kind of return.
Let me preface here that I'm not a tax expert. I encourage
you to talk to an accountant or at the least visit the
IRS's website or get a good book on taxes. Any home
business run for the purpose of making money is eligible
for business tax deductions including to but not limited
to:
1) Start-up kit - If your business has a start up
fee and/or kit required to start your business, you can
deduct this expense from your taxes. You need to be
careful about any product included in your kit.
Technically, products purchased for your personal use are
NOT tax deductible. Nevertheless, products that are used
as part of your presentation (i.e. demos or party plans),
are tax deductible. I have even heard of some people
deducting their product orders when ordering is a
requirement to get paid. Again, this can be a fine line
and should be discussed with your tax advisor.
2) Equipment and supplies required to build your
business. If you need a computer, printer, headset
phone or other equipment, you can deduct this on your
taxes. Read the tax form directions carefully as depending
on the cost, you may have to depreciate (deducting
portions of the equipment's purchase price over time)
equipment purchases. Other things you can deduct include
folders, pens, paper, printer ink, staples, post-its,
binders and anything else you need to buy to run your
business.
3) Services required to build your business. You
can deduct the cost to build and run a website (i.e.
domain name purchase and hosting fees) and online services
such as autoresponders or newsletter list management. You
can deduct only the part of your internet service that use
for business. If you are online 80% for business and 20%
for fun, you can deduct 80% of your internet service
costs. You cannot deduct your main phone line but you can
deduct any business related long distance and services
added such as voice mail or three-way calling. If you
install a second line into your home for business
purposes, you can deduct all fees related to that line.
4) Education, subscriptions, and memberships. If
you attended conferences or training programs to help you
build you business, you can deduct the expense of this
including mileage, course fee, course materials, and hotel
and meals (if overnight is required). Any books you buy
about building a business, marketing or other topics to
help you build your business are tax deductible. If you
subscribe to any trade journals or participate in
associations related to your business, you can deduct the
expenses of those as well.
5) Marketing expenses. Any expenses related to
promoting your business are tax deductible including ads
you run, professional materials you get printed (i.e.
business cards), networking events, and purchasing leads.
Include postage costs if you mail promotional literature.
6) Home Office deductions. As long as you don't
have an office elsewhere, you can deduct some of your
regular home expenses including a portion of your mortgage
or rent, and utilities. To determine how much you can
deduct, you need to measure your office and determine the
percentage your office takes up in your home. For example,
if your home is 1000 square feet and your office is 100
square feet, you can deduct 10% (100 sq. feet is 10% of
1000 sq. feet). If your mortgage or rent is $1000 per
month, you can deduct $100 per month...that's a $1200
deduction at tax time (12 months multiplied by $100). Plus
you can deduct the same 10% (or whatever amount your
office percentage) on your utilities.
7) Travel. You can deduct travel expenses that are
related to your business like conferences as mentioned
above but also, trips to the office store, delivering
products, meeting customers, or trips to the book store to
buy business related books. Any travel related to getting
your business done counts.
8) Retirement. Self-employed people are allowed to
put more money in a pretax retirement account than an
employee. According to David Bach in his book, Start Late
Finish Rich, self-employed people can save up to $41,000
pretax in a SEP IRA or One-Person 401(k)/Profit Sharing
plan as opposed to an employee under 50 can only
contribute $14,000 to his 401(k) (as of 2004).
Develop a system now for tracking all expenses. If you
order services, ebooks or other business related things
online, be sure to print out your receipts as well as save
them in a folder on your computer (most places email your
receipt that you can put in a 'receipt' folder in your
email program). File your other receipts in envelopes or
folders. Try to categorize them to make it easy during tax
time. For example, my phone receipts are separate from my
business receipts which are separate from my marketing
receipts etc.. Keep your mortgage, utility and bank
statements as well. To take a travel deduction, you need
to keep track of mileage on paper. You can use one of the
travel logs at the office store, use your PDA or any
system that works for you as long as its written. When you
have completed and filed your taxes, you still want to
hold on to all of this paperwork for at least 7 years just
in case of an audit.
I'm often surprised when people focus on the cost of
business when in fact, the just the home office deduction
alone more than make up for most expenses. The most
important thing is to get a good book or talk to a tax
advisor to help you find these and other great deductions.
You can visit the IRS's home business information here:
Tax Guide for Small Business
http://www.irs.gov/publications/p334/index.html
Starting a Business and Keeping Records
http://www.irs.gov/publications/p583/index.html
Business Use of your Home
http://www.irs.gov/publications/p587/index.html
Schedule C - Profit or Loss from Business
http://www.irs.gov/instructions/i1040sc/ar01.html
Self-Employment Tax
http://www.irs.gov/publications/p533/index.html
Tax Withholding and Estimated Tax
http://www.irs.gov/publications/p505/index.html
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