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Mary Kay, Lia Sophia, Silpada, 5Linx, Pampered Chef – to name a few…. These are just a handful of the self-employed consultants in the work world. Many of them are sole proprietors who have little to no understanding of the tax implications associated with it, the tax deductions available to them, or what they need to do to file taxes.
It is extremely important not to co-mingle deductible expenses with personal expenses. Opening a bank account for the business will help keep the expenses separate. This should be one of the first things on the list of “to-do’s” when beginning a business. A special tax treatment applies to start-up expenses-expenses incurred prior to opening the business. Therefore, these receipts must be kept separate from the receipts for general operating expenses.
One type of deduction that helps to reduce the overall tax liability is the auto expense deduction. Auto expenses are deductible either by using the standard mileage rate or actual expenses. The standard mileage rate is the easier method as you simply multiply the current rate ($.555 for 2012) by the total number miles. When using the standard mileage rate, a mileage log will need to be presented in the event of an audit to substantiate the deduction. The actual expense method requires you to keep detailed records reflecting the actual cost of related expenses such as gas, oil, insurance, repairs, maintenance, licenses, car washes and depreciation. If you use a vehicle for both business and personal purposes, the expenses will have to be divided proportionately.
While most business owners are aware of the deduction for meals and entertainment, they must be careful to keep accurate records when claiming deductions for these expenses. The records should contain the date of the meal or event, the name of the person they met with and the topic of conversation when possible. Meals that are consumed during the everyday course of business are not deductible. However, generally 50% of the cost of meals consumed when traveling for business purposes can be used to reduce taxable income.
The IRS allows a home-based business deduction for self-employed taxpayers if they meet certain requirements. The home must be used regularly and exclusively for business. When taking advantage of the home-based business deductions, a percentage of other expenses pertaining to the home are deductible as well. The amount of deductible expenses is subject to specific limitations and ordering provisions. Please consult a tax professional for guidance.
This article contains general tax information for taxpayers. Each tax situation may be different, so do not rely upon this information as your sole source of authority. Please seek professional advice for all tax situations. Tax professionals are experts who keep current on tax law changes. They can save you time and offer insight on how to use the tax breaks available to you.
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