What Tax Breaks can You Avail of for your Online Business?
All businesses, regardless of the type, are in the same standing when it comes to tax obligations. The IRS requires that as an entrepreneur, you should report all of your income, file your tax return and pay other amounts that are owed to the government. This order extends to business transactions that are mostly done online. Fortunately, several tax benefits, and even loopholes, that apply to regular offline ventures can also be utilized in online businesses. Knowing what these are, is specifically important for you to avoid dealing with IRS problems in the future.
One primary tax break that online entrepreneurs can use is having a home office. Often, online businesses are done at home, hence, depending on specific requirements, business owners can actually qualify for these significant tax deductions. They just have to remember that for a house to be considered as home office, it must be regularly and solely used for business purposes. A dining room utilized as an office during the day will not qualify under this type of tax deduction.
The primary and main use of any given space or room should be for the business. This includes daily operations and client meetings. However, you may divide the use of that space for personal and business reasons according to percentages. For instance, a room can be used as a home office 75% of the time, and a family area, 25% of the time. However, when possible it is always better that you keep it rather simple and make an effort to use the space solely for business or else you may have an IRS problem on your hands.
It is also imperative to prove to the IRS that your home office is your principal place for business. Entrepreneurs are not prone to violating this condition as online businesses are largely done at home. The importance of this requirement lies on the fact that the IRS has to ensure that business-related endeavors are done in the confines of the home office, and not somewhere else.
These two main requirements, when met, will certainly allow you to deduct many costs associated with your office and home. Among other expenses, these costs include rent or mortgage payments, insurance costs, utility bills and property taxes. You can not, however, deduct all of your rent or mortgage payment. The way it works is usually through a percentage computation. If your office makes up for 25% of your home, and your mortgage payment is $1,000 monthly, then you would be able to deduct 25% of that $1,000 which is $250. So every month you would be able to deduct $250 which calculates to $3,000 per year. This is essentially how you should deduct expenses related to your home office. Keeping all of your documents for your online business will definitely go a long way towards avoiding an IRS problem.
There are also restrictions imposed to online business tax deductions. For example, you cannot claim for a number of deductions which, when totaled, will record a net loss for that year. Technically, you can’t claim for a net loss equal to the $10,000 difference of an annual revenue of $50,000 and total exemptions of $60,000. What you can do in this case, however, is claim for a net gain of zero.
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