Whether you have a conventional business where transactions are primarily offline, partially online, or completely online, you will need to file your taxes. When it comes to tax season, you’re in the same situation with other nature of businesses. You are still required by the IRS to report all of your income, file your tax return and pay your taxes and other corresponding expenses. It’s a good thing though that many tax benefits and even loopholes that apply to traditional business can also be applicable to your online endeavors. The challenge is for you to determine which of those benefits and loopholes apply to your company so that you will not be a candidate of an IRS problem.
To claim for tax deductions, online entrepreneurs should utilize the fact that a huge portion of their business is actually run at home. They can avail of significant tax deductions if they qualify for the requirements set by the IRS regarding this matter. One of these conditions is that their home office must be used regularly and exclusively for the purposes of their business. A normal dining room that is converted to an office during the day will not be a strong claim for this type of tax deduction.
The primary and main use of any given space or room should be for the business. Meetings with clients and daily operations are just some of the activities that should be conducted in that particular part of the house. However, you may divide the use of that space for personal and business purposes 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’s 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.
Another condition that the IRS requires for this tax deduction is that the space you are claiming as your home office must be considered as your primary place of business. Often, online business owners will not have a hard time complying with this requirement because online business is mainly carried out at home anyway. This stipulation is just made for the IRS to ensure that business-related activities are not done in some other place.
Meeting these two significant requirements for a home office will definitely translate to substantial savings on your home and business tax obligations. These include expenses related to rent or mortgage payments, insurance, utility bills and property taxes. One important thing to take note is that deductions are done on a percentage basis and you cannot be exempted on the full amount of your rent. To demonstrate, if your monthly mortgage is $10,000 and 25% of the home is used for business, you will be entitled to a monthly deduction of $250, and a yearly exemption of $3,000. Just remember to have all your online business records so if questions pop up, you will not have problems in proving your claims.
There are also restrictions imposed to online business tax deductions. For instance, you cannot claim for a number of deductions which, when totaled, will record a net loss for that year. Technically speaking, you can’t claim for a net loss equivalent 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 declare a net gain of zero.