Most of you are probably taking some deductions for your home-based business. Great! However, I'm almost certain that most of you are not taking advantage of all the breaks you are afforded.

Why?

You probably don't realize all you can take. Or, could it be that you're afraid to take too much for fear that it might trigger a problem with the IRS?

Folks, you are entitled to some wonderful tax benefits as a home-based professional. Take advantage of them, you have earned them. Tax reduction is not for the timid!

The key here is confidence. I'm not talking personality. I'm talking about something more tangible that every home-based business owner can obtain fairly easily.

Here are the two things you need to obtain this confidence for tax issues: 1) knowledge and 2) record keeping.

I'm going to walk you through both of these in this issue, giving you specifics on tax deductions as well as some thoughts on keeping records.

When you are done reading this article, you will say, "Wow, I hadn't thought of that!"

Let's delve right into the importance of record keeping. Why is it important? For starters, it's the main reason people get had by the IRS. Quite frankly, the IRS is not interested in how much we make or spend. Nope. They simply want to know if we can prove it.

What are they looking for?

Three things: 1) we already talked in a recent issue about the IRS's need for proof of profit motive, 2) receipts, and 3) accounting records.

Specifically, you'll need to keep receipts, invoices, cancelled checks, bank statements, and credit card statements.

Now, while the frustration of finding paperwork and struggling through your 1999 return may still be fresh on your mind, this is a great time to do something about organizing these business records. I highly suggest you get a good small business accounting software like QuickBooks and use it. Careful! You can waste a lot of time with your accounting software, in fact, it's easy to make it an art form. Keep in mind that all you really need to do is to keep track of the money you take in and the money you spend.

Don't be a "shoebox" bookkeeper. Although many would rather not admit it, you'd probably find that many subscribers to this list stuff their receipts into a box. It's an incredible temptation. Resist the impulse. Not only will the IRS not be impressed, but good record keeping is simply an integral part of an efficiently run business. Instead, slip your receipts into some generally categorized or chronological files. I like to store mine in an enclosed accordian file. They don't slip out as easily.

Get into the habit of annotating your receipts. On the back, jot down the nuts and bolts: who, what, when, or anything that will be helpful in tracking the expenditure. For example, you have a dozen receipts to The Pizza Shop. If you haven't put any notes on the receipt, you'll have a dandy time trying to convince the IRS that they were all truly business-related. Enough said.

Onto tax deductions.

I mentally place deductions I can take into two categories: 1) home office deductions and 2) everything else. After all, as home-based business owners, we can take special deductions that others cannot.

What are those home office deductions?

1. Your Place of Residence:
This may be a house, apartment, condominium or mobile home. You can either charge rent for the office space you use in your place of residence, or you can deduct the depreciation on your "office building" (home office). Some think that you must dedicate an entire room to be able to take the home office deduction. Not so. As long as you set aside an area of a room for exclusive business use, you can use the other part for personal reasons without affecting the deduction. Just make sure the areas are separate, and then deduct that portion of the room that is for business use. If your place of residence is rented, you can depreciate an allocatable portion of that rent for your home office.

2) Office Furniture and Equipment:
Depreciation on your office furniture and equipment would include any desks, tables, chairs, couches, lamps, calculators, computers, scanners, printers, filing cabinets, stereos, etc. Anything you put into your office. When you purchase new furniture or equipment for your home office, don't forget to keep and file receipts.

3) Homeowner's Insurance:
If you own your own home, a portion of your homeowner's insurance is deductible.

4) Utilities:
A portion of your electric bill for providing lights and current to your home office is deductible. Likewise, a portion of your heating and air conditioning bill is also allowable.

5) Phone:
Sometimes it's easiest to have a separate phone line and phone bill for your home office. Otherwise, simply deduct a portion of your bill. Don't forget to include in that portion long distance calls, equipment rental, call waiting, call forwarding, voice messaging, charges for a second line, or any other extras.

Now, let's talk briefly about all other expenses. Some you will find very interesting.

1) Transportation and Travel:
Automobile expenses incurred in your business travel are deductible, whether they be mileage or non-travel transportation expenses, i.e. insurance, upkeep, etc. If you have one car that you use for both personal and business, simply deduct that portion of your car expenses that are directly attributable to business. Do you run to your P.O. box on a regular basis? Do you use your car to check on your investments? Banking? Mailing letters or packages? Keep your receipts for parking fees, interest, taxes, and tolls. As of April 1, 1999, the standard mileage rate is 31 cents per mile. Furthermore, there is no law prohibiting you from combining a business trip and a vacation, i.e. you are entitled to a deduction for simply attending a business convention. So, if you can coincide business events with your vacation, deduct away! And, if a business purpose can be established, the expenses of your spouse may also be deductible.

2) Meals and Entertainment:
In order to deduct any expenses for travel or entertainment, you'll need to have a receipt or other record for lodging expenditure, etc. Any food or drink under business circumstances are generally considered a deductible business expense. When you go out with friends or relatives, do you ever pick up the tab? If they are our could be potential clients, and if you discussed business with them, then that expense would be deductible. Always make sure you have your business cards with you wherever you go. If you find occasion to hand one out, the expense can be considered business. You can't simply deduct recreation or amusement, unless you can prove it was directly related to business, or that it resulted in a bona fide business discussion. Receipts should always detail amounts and expenses.

3) Gifts:
Business gifts you make directly or indirectly to any individual are allowed as deductible expenses. There is a limit. The total value of business gifts during the tax year cannot exceed $25 per individual. This limit does not include packaging, shipping or any other costs in delivery costs. Sorry, husbands and wives, gifts to each other can't be included in this deduction.

4) Other Deductions:
For the sake of space, I'll simply list other allowable deductions. Advertising, uniforms, medical premiums, borrowing money from your company, lending to your company.

5) Employing Members of the Family:
I wanted to list this separately because there are so many possibilities with employing members of your family. Consider splitting your income with another family member. The employment must be bona fide and the salary paid must be reasonable. Even a young child can be compensated for cleaning your office, mailing your letters, or opening mail. A 1982 tax court decision allowed a $1,200 deduction for a 7-year-old child who performed a variety of services for a mobile-home-park operator.

Now, here's something very enticing about employing family members. Let's say I have an office that requires a secretary, receptionist, or customer support person to be present at all times during business hours or during off hours, and the only person available is a member of my family. I can deduct the value of any meals furnished to the employee (family member) during the hours of their employment and if the meals are furnished on my business premises. These meals are not compensation for my employee, but they are a deductible business expense to me. Given the price of food today, this is an enormous benefit that can result in substantial savings. At $5 per lunch, five times a week for 50 weeks, your total deductible expense would be $1,250.

We have invited a special guest to take this one step further in the next issue. He will explore innovative and unheard of strategies for online business tax models. When I first heard of his ideas, I was amazed. There is no more vocal and enthusiastic expert than our guest for next week.

Stay tuned...

If you're afraid you're not going to accurately finish your return forms on time, relax. The IRS gives you some leeway.

Sole proprietorships can obtain an extension which gives them until August 15th to file their returns. To get the extension, you need to fill out IRS Form 4868 and pay the estimated tax due by April 15.

Partnerships can obtain an extension giving them until July 15th, by filing Form 8736 by April 15th.

Corporations can obtain an extension which gives them until September 15th by filing Form 7004 and paying the estimated taxes due by March 15th.

There is one warning, however. Be aware that if you underestimate the amount of taxes due by 10% or more, the IRS will hit you with a stiff penalty. As such, it is in your best interest to file on time.

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