Tax

Starting a Home-Based Business

More than half of all businesses today are home-based. Every day, people are striking out and achieving economic and creative independence by turning their skills into dollars. Garages, basements, and attics are being transformed into the corporate headquarters of the newest entrepreneurs – home-based business people.

And, with technological advances in smartphones, tablets, and iPads as well as rising demand for “service-oriented” businesses, the opportunities seem to be endless.

Is a Home-Based Business Right for You?

Choosing a home business is like choosing a spouse or partner: Think carefully before starting the business. Instead of plunging right in, take the time to learn as much about the market for any product or service as you can. Before you invest any time, effort, or money take a few moments to answer the following questions:

• Can you describe in detail the business you plan on establishing?
• What will be your product or service?
• Is there a demand for your product or service?
• Can you identify the target market for your product or service?
• Do you have the talent and expertise needed to compete successfully?

Before you dive headfirst into a home-based business, you must know why you are doing it and how you will do it. To achieve success your business must be based on something greater than a desire to be your own boss and involves an honest assessment of your personality, an understanding of what’s involved, and a lot of hard work. You have to be willing to plan for the long-term and be willing to make improvements and adjustments along the way.

While there are no “best” or “right” reasons for starting a home-based business, it is vital to have a very clear idea of what you are getting into and why. Ask yourself these questions:

• Are you a self-starter?
• Can you stick to business if you’re working at home?
• Do you have the necessary self-discipline to maintain schedules?
• Can you deal with the isolation of working from home?

Working under the same roof that your family lives under may not prove to be as easy as it seems. It is important that you work in a professional environment. If at all possible, you should set up a separate office in your home. You must consider whether your home has space for a business and whether you can successfully run the business from your home. If so, you may qualify for a tax break called the home office deduction. For more information see the article, Do You Qualify for the Home Office Deduction? below.

Compliance with Laws and Regulations

A home-based business is subject to many of the same laws and regulations affecting other businesses, and you will be responsible for complying with them. There are some general areas to watch out for, but be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business.

Zoning

Be aware of your city’s zoning regulations. If your business operates in violation of them, you could be fined or closed down.

Restrictions on Certain Goods

Certain products may not be produced in the home. Most states outlaw home production of fireworks, drugs, poisons, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.

Registration and Accounting Requirements

You may need the following:

• Work certificate or a license from the state (your business’s name may also need to be registered with the state)
• Sales tax number
• Separate business telephone
• Separate business bank account

If your business has employees, you are responsible for withholding income, social security, and Medicare taxes, as well as complying with minimum wage and employee health and safety laws.

Planning Techniques

Money fuels all businesses. With a little planning, you’ll find that you can avoid most financial difficulties. When drawing up a financial plan, don’t worry about using estimates. The process of thinking through these questions helps develop your business skills and leads to solid financial planning.

Estimating Start-Up Costs

To estimate your start-up costs include all initial expenses such as fees, licenses, permits, telephone deposit, tools, office equipment, and promotional expenses. In addition, business experts say you should not expect a profit for the first eight to ten months, so be sure to give yourself enough of a cushion if you need it.

Projecting Operating Expenses

Include salaries, utilities, office supplies, loan payments, taxes, legal services, and insurance premiums, and don’t forget to include your normal living expenses. Your business must not only meet its own needs but make sure it meets yours as well.

Projecting Income

One of the most important skills you will need is knowing how to estimate your sales on a daily and monthly basis. From the sales estimates, you can develop projected income statements, break-even points, and cash-flow statements. Use your marketing research to estimate the initial sales volume.

Determining Cash Flow

Working capital – not profits – pays your bills. Even though your assets may look great on the balance sheet, if your cash is tied up in receivables or equipment, your business is technically insolvent. In other words, you’re broke.

Make a list of all anticipated expenses and projected income for each week and month. If you see a cash-flow crisis developing, cut back on everything but the necessities.

If a home-based business is in your future, then a tax professional can help. Don’t hesitate to call if you need assistance setting-up your business or making sure you have the proper documentation in place to satisfy the IRS.

• By Leon Clinton
• January 16, 2020

Got Debt? Tips to Improve Your Financial Situation

If you are having trouble paying your debts, it is important to take action sooner rather than later. Doing nothing leads to much larger problems in the future, whether it’s a bad credit record or bankruptcy resulting in the loss of assets and even your home. If you’re in financial trouble, then these steps will help you to avoid financial ruin in the future.

If you’ve accumulated a large amount of debt and are having difficulty paying your bills each month, now is the time to take action – before the bill collectors start calling.

1. Review each debt. Make sure that the debt creditors claim you owe is actually what you owe and that the amount is correct. If you dispute a debt, first contact the creditor directly to resolve your questions. If you still have questions about the debt, contact your state or local consumer protection office or, in cases of serious creditor abuse, your state Attorney General.

2. Contact your creditors. Let your creditors know you are having difficulty making your payments. Tell them why you are having trouble, perhaps it is because you recently lost your job or have unexpected medical bills. Try to work out an acceptable payment schedule with your creditors. Most are willing to work with you and will appreciate your honesty and forthrightness.

Most automobile financing agreements permit your creditor to repossess your car any time you are in default, with no advance notice. If your car is repossessed, you may have to pay the full balance due on the loan, as well as towing and storage costs, to get it back. Do not wait until you are in default. Try to solve the problem with your creditor when you realize you will not be able to meet your payments. It may be better to sell the car yourself and pay off your debt than to incur the added costs of repossession.

3. Budget your expenses. Create a spending plan that allows you to reduce your debts. Itemize your necessary expenses (such as housing and healthcare) and optional expenses (such as entertainment and vacation travel). Stick to the plan.

4. Try to reduce your expenses. Cut out any unnecessary spending such as eating out and purchasing expensive entertainment. Consider taking public transportation or using a car-sharing service rather than owning a car. Clip coupons, purchase generic products at the supermarket and avoid impulse purchases. Above all, stop incurring new debt. Leave your credit cards at home. Pay for all purchases in cash or use a debit card instead of a credit card.

5. Pay down and consolidate your debts. Withdrawing savings from low-interest accounts to settle high-rate loans or credit card debt usually makes sense. In addition, there are several ways to pay off high-interest loans, such as credit cards, by getting a refinancing or consolidation loan, such as a second mortgage. Keep in mind, however, that second mortgages greatly increase the risk that you may lose your home.

Be wary of any loan consolidations or other refinancing that actually increase interest owed, or require payments of points or large fees.

You can regain financial health if you act responsibly. But don’t wait until bankruptcy court is your only option. If you’re having financial troubles, help is just a phone call away.

• By Leon Clinton
• January 13, 2020

Tax Breaks for Taxpayers Who Itemize

Many taxpayers opt for the standard deduction because it is easier, but sometimes itemizing your deductions is the better choice – often resulting in a lower tax bill. Whether you bought a house, refinanced your current home, or had extensive gambling losses, you may be able to take advantage of tax breaks for taxpayers who itemize. Here’s what to keep in mind:

1. Deducting state and local income, sales and property taxes. The deduction that taxpayers can claim for state and local income, sales and property taxes is limited to a combined, total deduction of $10,000 – $5,000 if married filing separately. State and local taxes paid above this amount can’t be deducted.

2. Refinancing a home. The deduction for mortgage interest is limited to interest paid on a loan secured by the taxpayer’s main home or second home. Homeowners who choose to refinance must use the loan to buy, build, or substantially improve their main home or second home, and the mortgage interest they may deduct is subject to the limits described in the next bullet under “buying a home.”

3. Buying a home. People who bought a new home in 2019 can only deduct mortgage interest paid on a total of $750,000 ($375,000 married filing separately) in qualifying debt for a first and second home. For existing mortgages, if the loan originated on or before December 15, 2017, taxpayers may continue to deduct interest on a total of $1 million in qualifying debt secured by first and second homes.

4. Charitable donations. Donations to a qualified charity also qualify as a tax break. Taxpayers must itemize deductions to deduct charitable contributions and must have proof of all donations. The non-profit organization must be a 501(c)(3) public charity or private foundation and non-cash donations may require a qualified appraisal.

5. Deducting mileage for charity. Miles driven using a personal vehicle for charitable service activities could qualify you for a tax break. Itemizers can deduct 14 cents per mile for charitable mileage driven in 2019.

6. Reporting gambling winnings and claiming gambling losses. Taxpayers who itemize can deduct gambling losses up to the amount of gambling winnings. You may deduct gambling losses; however, the amount of losses you deduct can’t be more than the amount of gambling income you report on your return. Furthermore, you must keep a record of your winnings and losses, for example, you must keep an accurate diary or similar record of your gambling winnings and losses and be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and losses.

Investment interest expenses. Investment interest expense is interest paid or accrued on a loan or part of a loan that is allocated to property held for taxable investments – the interest on a loan you took out to buy stock in a brokerage account, for example. Taxable investments include interest, dividends, annuities or royalties.

Wondering whether you should itemize deductions on your 2019 tax return? Don’t hesitate to call the office and find out.

• By Leon Clinton
• January 10, 2020