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What You Should Know About Income Taxes

For any business person who owns and operates his or her own business, claiming a business expense deduction is often critical. With all the restrictions and formalities, it is doubtful that most of us have the time and energy to attempt to keep track of everything that we can deduct from our income. This is especially true if you are mainly working from home, and are unable to travel and meet expenses from the outside.

From January 1, 2004, through December 31, 2004, the income tax rates are about four percent higher for self-employed taxpayers than they were for those in the same income groups under previous law. This means that many taxpayers who are essentially “self-employed” are currently having a hard time paying their income taxes because of the additional tax being placed on Uncle Sam’s table.

As a home business owner, you should be aware of what you can deduct for your income taxes. There are many rules and regulations that govern what can and cannot be deducted for income taxes.

In order to deduct expenses related to your business, you will usually need supporting documentation, but IRS records are available from which you can find detailed information on business-related expenses. This is especially true if your income is lower than average for a self-employed professional because certain expenses cannot be deducted at all.

The actual expenses must relate to the business, and not simply personal expenses that could be deducted on your personal tax return. For example, if you are a self-employed artist and create a saleable art product, you will be able to deduct the actual business-related costs such as the cost of your supplies and an artist’s restriction.

Of course, the IRS has a complicated filing system, but if you are a home business owner and have had a profitable business for at least two years, and you have kept detailed records of your expenses relating to your business, most of your deductions will be granted. The IRS computer systems will be easier to deal with, so filing as a business will be easier too.

One common area where self-employed persons can get a significant deduction is in the area of insurance premiums paid for business purposes. If you are self-employed, you can deduct insurance premiums on your income tax return. If the premiums were paid during the tax year for the services rendered (as is the case with automobile insurance for those who are self-employed), you should be able to write off the entire insurance amount. If such a write-off results in a Schedule C deduction, you should be able to deduct the entire premiums on that schedule.

While the rules surrounding deducting your business-related insurance premiums are complex and hard to work out, it is possible to get deductibles and collaterals and claim the premiums on the Schedule C deductions that you file. claimed on the back of Schedule E, line 7. If you are in a situation where you are no longer self-employed and have documentation to support that you are retired, disabled, or your earnings are so low that you cannot claim any tax-deductible business-related insurance premiums, you must file form 4562 instead of form 4tered.

If your income is low, but you are considered to be self-employed (you report your income, deductions, exemptions, and credits on Form 1040, line 21.) you may be able to ask the IRS to declare you to be an independent contractor, which will legally reduce your income to zero. If you have already determined that you are an independent contractor, you may be able to deduct all of your compensation as long as it is based on services rendered to the business, including your retirement and health insurance premiums.

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