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Sunday, September 04, 2005

Tax Tips for Online Entrepreneurs

A quick look at money-saving deductions, how to classify the people who work for you and more
Enrtrepreneur Magazine December 27, 2004 By Tim W. Knox

When tax time rolls around, you can hear the collective groan of all the businesspeople who have to start sorting their financial records and finding out just how much they're going to have pay the government this year. Chances are that even though you operate an online business, you're feeling pretty much the same way as the dreaded tax season approaches. However, there are some facts about your taxes that might help ease your woes.

For example, do you operate your business from your home? The majority of online entrepreneurs do, and that entitles them to take some significant tax deductions if you meet certain IRS conditions. For one, your home office must be used "exclusively" and "regularly" for business use. That means the primary purpose of that space is for business, such as contacting clients or managing your books. It also means that the space is not used for family or personal activities, unless you want to start dividing up that time by saying 75 percent of the time the home office is used for business and 25 percent of the time it's used for playing games or doing homework.

The second IRS stipulation is fairly easy for most online business owners to meet: Your home office must be your "principal place of business." Essentially, that phrase just means that the business activities you conduct in your home office can't be conducted anywhere else, such as in a rented office space.

If you meet both of those requirements, then you can deduct many of the costs associated with your home, including property taxes, utility bills, insurance costs, mortgage or rent payments, even the cost maintaining your property. Of course, if your mortgage payment is $800 per month, you can't deduct that entire amount if you only use a small portion of your home for business. You need to determine what percentage of your home is used as a home office, then you'll use that figure to calculate the deductions you can take. For example, if your home office represents 10 percent of your home's square footage, and your mortgage payment is $800 per month, then you could deduct $80 every month, which would be $960 for the year. The same applies to all the other expenses related to your home.

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