This article was written exclusively for MadameNoire Business by financial expert Lynn Richardson. Known as the “Madea of Money,” Richardson is a money coach, author, the president of Hip Hop Sisters and COO of Russell Simmons’ Hip Hop Summit. You can follow her on Twitter and on her website. And be sure to join us next Thursday at 7pm ET on @MadameNoireBiz for the next in our #MNBizChats series. We’ll be offering tips and discussing all manner of financial matters. Don’t miss it!
It’s simple: a home-based business will get you a refund when tax season arrives. The average American only takes about eight tax deductions: real estate taxes, mortgage interest, charitable donations, and a few others. But if you have a home-based business — and you actually run your business like a business with the intent to make a profit –there are over 440 tax deductions available to you that you can itemize on Schedule C of your 1040 tax return.
One of my clients organizes her college reunion every year. Between site visits, travel, and meals, she spends over $6,000 each year and she’s never made a profit in the past. Now that she is in business for herself as an event planning consultant, she writes off every bit of the class reunion expense that is related to her home business. (See IRS Pub 334)
Have you ever invited people to your home for a dinner party? Well, if you have a home-based business, and you truly have the intention to discuss business, turn your gathering into a business dinner party! (See IRS Pub 463) Place information about your business near the food. Take pictures of people looking at your business cards. Answer questions about your business and always ask for referrals. When guests ring your doorbell, greet them by saying “How’s business?” Get it? I know you do! You can write off what you spent on meals, invitations, and other items related to your business dinner party.
And yes . . . it’s always business when it comes to the kids too. The IRS allows you to hire your children to work in your home-based business, write off the income you pay them (they don’t have to report it unless it’s over $5,000 annually), then they can use the money they earn to buy school clothes, school supplies and anything else they need. (See IRS Pub 15, Child Employed By Parents) For me, $5,000 times three kids equals $15,000 in additional tax write-offs each year. And when nieces and nephews and god-children ask for money, I hire them to complete a project for my business, I send them a w9 at the end of the year and I write that off too! (See IRS Pub 535)
So, if you haven’t done so already, take a look at what you like to do, what you are good at, and what you spend your time doing for fun and turn it into a business. I’m not suggesting that you pretend to be in business, but rather, that you actually make a decision to BE in business for yourself and get educated about the tax benefits. Most businesses do not require a license or a tax ID number, but check with your local government for registration or permit requirements.
In order for your business to be recognized as a business and not a hobby by the IRS, you must have the intent on making a profit and you must run your business like a business by keeping good records. When you get a receipt, write on the back: who was involved, what you discussed (if it was a dinner meeting), where you were, how much you spent (because receipts fade) and when the event took place. You don’t need a receipt for expenses under $75 (unless it’s for a hotel room) but I suggest you keep them all anyway. Plus, you should keep a small “tax diary” to record your daily business expense notes and mileage. And, of course, meet with your tax professional to discuss your options and how they impact you personally.
Some say this is hard work, but so is being broke! So do the work and remember my mantra, “It’s Always Business.” And keep in mind, your business will grow as a result of your work and you get to interact with people and have a good time. All of that and a tax refund!
For more information on tax rules and regulations, visit IRS.gov.