Home business tax deduction for self-employed

Those who are self-employed or are planning to start a business from their home should make full use of the provisions made under the different home business tax deduction heads. These deductions include:

Home Office: A home office is that part of the house, which you use solely for your business functions. You can benefit from the home office deduction if you use this office regularly and exclusively for business. Indirect expenses and depreciation too can be deducted.

Car: If you use a car to carry out your business then you can deduct the business cost of the car. You can also deduct the operating and maintaining expenses of the car. The deduction can be based on actual costs or the IRS mileage rate, whichever is more beneficial to you.

Personal assets: You can claim a deduction on personal assets, like computers, that you use in running your business. You, however, have to qualify the percentage of use.

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Alternative Minimum tax and Itemized deductions

5. Alternative Minimum Tax: Alternative minimum tax is applicable if an individual s taxable revenue is more than a predefined amount. In that case, the individual would otherwise pay negligible tax now has to shell out a certain amount, which lowers the advantages of certain deductions and credits.

6. Itemized Deductions: The alternative to the standard deduction is itemized deductions. For the year 2004, the major items included in itemized deductions were:

i) State and local income and property taxes
ii) Donations made to charitable organizations
iii) Employee transference expenses
iv) Medical expenses incurred
v) Casualty losses
vi) Interest paid on mortgage

However, the individual can either avail standard deduction or itemized deduction.

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Standard deductions and Itemized deductions

3. The Standard Deduction: When individuals have minimal below-the-line deductions, they are directly granted a standard deduction. The standard deduction under different heads in 2004 was as follows:
i) Single $4,850
ii) Head of household $7,150
iii) Married filing a joint return $9,700
iv) Qualifying widow(er) with dependent child $9,500
v) Married filing a separate return $4,850

4. Miscellaneous Itemized Deductions: These usually include:
i) Interest paid
ii) Taxes paid
iii) Losses incurred
iv) Charitable contributions
v) Medical costs borne

Such miscellaneous deductions are permissible if and only if they surpass 2% of adjusted gross income.

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Heads under which you can avail deductions

2. Deductions: In addition to the standard deduction, some common above-the-line deductions include:
i) Trade/ Business expenses
ii) Alimony
iii) IRA contributions
iv) Net capital losses
v) Expenses incurred due to property used for income generation

Income tax laws are not easy to understand. It is therefore always possible that individuals choosing the standard deduction may or may not be able to take advantage of other deductions.

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Heads under which you can avail exemptions

The federal income tax deduction is a statutory requirement under the American laws. It has to be paid by all American citizens who fall under the tax bracket as decided by the American government. Taxable income is calculated by removing (a) excluded income, (b) exemptions, and (c) permissible deductions from the individual s gross income.

The following are the heads under which you can avail the tax deduction:

1. Exemptions: Some common exclusions from gross incomes are:
i) Earnings made from life insurance contracts
ii) Earnings made from gifts and inheritances
iii) Proceeds granted for personal injuries
iv) Interest received from state and municipal bonds

It must however be noted that all of the above exemptions are subject to certain conditions, and thus a tax adviser s help must be taken while availing these exemptions.

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Expenses that qualify for tax deduction in daycare

If you qualify as a family daycare provider then you can claim deduction on expenses made on providing meals and snacks. If you have employees, you can deduct 100% of their food cost as expense, provided that their salary does not include a food component. If you provide snacks and meals to your wards then to claim deductions you need to maintain records of consumption and show them to be exclusively for the daycare centre. Since your own household is fed from the same kitchen it may be a difficult process to follow. It is advisable therefore to show the standard rate for meals and snacks as expense, and claim deduction.

Standard rates are applicable per person for breakfast, lunch dinner and three snacks per day. These rates include beverages but not non-food material that may be needed to prepare or serve the food. Such utilities, however, can be shown as a separate expense.

So while daycare can be a taxing business, a little care could make sure that the taxes don t make you feel so. Plan ahead and you could take care of it all!

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What are the rooms that qualify for daycare tax deduction?

This does not mean that you have to log hours physically and maintain records of the same. Let s say you run a cr che for children in your basement, for x hours a day, every weekday. You may use the basement for personal use for the rest of the time, it does not matter; you are eligible to show the time used and claim deductions. If however, you were to use the basement only occasionally for babysitting, you could not claim it as an expense.

Now along with the basement you could well be using another room in your house where children could take a nap. Though the room is unlikely to be used all the time, you need to keep it available through the business day. This room therefore also qualifies as an expense head and is eligible to figure in your
deduction. All expenses related to the maintenance and upkeep of these rooms should figure in your expense list.

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Deductions related to the premises of daycare

When you run a daycare facility there are certain things you must keep in mind before calculating your deductions. First, you are entitled to deductions related to the premises from where you operate, in this case your home.

You need to find out exactly what portion of your house you use for business and, with what frequency. If you use the premise exclusively for daycare then
you are eligible to deduct all expenses, subject to the stated limits. However, if the usage is part business and part personal then you have to state what
percentage of the total use is for business.

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Eligibility for daycare tax deduction

If you have set up a day care business in your home, you are eligible for daycare tax deduction. This deduction is valid even if you do not use the premises exclusively for business. What is a care centre by day can well be home by night; and you will still be eligible.

However, it is important to know what qualifies as daycare. When you provide care for children or individuals incapable of looking after themselves because of physical or mental impairments you are in the daycare business. But to run one, you need to have valid certifications or exemptions. If, however, you have had your license revoked or application rejected, you are not eligible to run a daycare centre.

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Types of work that your kids are entitled to do

Kids are legally allowed to be hired as employees by their parents when they are 7 years old, provided that the work assigned to them is not mentally and physically challenging, and is within their means to achieve it. The number of hours and the type of assignments completed by the child should be recorded on an Excel Sheet. As long as the pay and the work given to the child are reasonable, you can avail of the tax deduction.

The wages given to your kids do not go into their piggybanks, but into your bank. The money can, and will, be spent only with your approval on the necessary clothes, education, toys, and so on.

Finally, the most important record to keep is to make sure that your kids do not pay for more than 49% of their expenses. Their total expenditure thus needs to be tracked at all times, because if they cross the 50% mark, then you end up losing them as an itemized deduction on your personal return.

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