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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3755
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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I operate a business, where I create letters, following a specific

Resolved Question:

I operate a business, where I create letters, following a specific set of instructions, for my customers to submit, in order to get Unbanned from video games they play. For example: A customer of mine would get banned from a video game World of Warcraft, and would contact me, for my methods to help appeal their ban through the support staff at World of Warcraft. I create the letter, provide it to the customer, and they submit it to the game provider.

In the past 5 months, I have earned roughly $20,000 income from doing this. I am wondering if there is a list of ways I can cut the taxable income, or find expenses that I could pay, that would lower the amount of taxes I must pay at the end of the year. I operate this from my house, on a laptop. Because I don't actually have an office, is there anything I can do to use my work income, to pay off things, and make it business expenses.
Submitted: 8 months ago.
Category: Tax
Expert:  Lane replied 8 months ago.

Lane :

Hi,

Lane :

Yes, a good pace to start is by using the schedule C that you should be filing with your tax return to report our business' income and expenses

Lane :

The Schedule C is essentially your businesses Profit and loss statment, the botXXXXX XXXXXne (AFTER EXPENSES) flows to line 12 on the 1040 tax return "Business income or loss."

Customer:

I was looking at that before, but is there anyway I can use my home expenses, as business expenses as well? Since I operate this form home, I wasn't sure if that was permitted.

Lane :

Internal revenue code §162 says that you can deduct all of the ordinary and neccessary expenses of your business

Lane :

And on the home? yes

Lane :

There are two level of the "home office deduction"...

Lane :

(1) taking a portion of you mortgage or rent, utilities, and even depreciation (against things that are already there and (2) the things that are specific TO the business, ISP costs, a dedicated phone line, office supplies, etc

Lane :

The test for the "home office deduction is the following:

Lane :

The part of your home that you use must be use regularly and exclusively for business ... s the cleanest way to do it is use one room as your office and nothing else

Customer:

Yes, I have an office room established at my house.

Lane :

The whatever that square footage is (as a percentage of the total square footage f your home) becomes the factor tha lets you deduct a portion of rent, UTILITIES, ETC.

Lane :

pERFECT

Lane :

Hang on and I'll get you a couple of really good articles on this

Lane :

As a matter of fact... New in 2013 is the simplified home office method, where you simply use square feet x $5

Lane :

Using that method, however, you don't add the additional pur office costs... It's supposed to be built into the $5/sq ft

Customer:

Ok, but I can only deduct from the office, even though I may operate in other rooms. I should just operate from my office, and deduct that.

Lane :

Sure you can move around, but you need to have that SPACE that's exclusively FOR the business so you can use that to get to the % of total home space

Lane :

You can also use the room based method 5 rooms in the apartment, one room s an office 20% of the rent becomes deductible

Customer:

Ok. Also, would I need to be paying that portion of my mortgage from a business bank account, or would I be able to just pay my mortgage as normal, and factor it in at the end of the year ?

Lane :

No, normal is fine

Lane :

because this is the HOMBE office deduction

Lane :

(sorry for the typos)

Customer:

And, would that be the same for expenses such as the laptop I purchased?

Customer:

No worries :)

Customer:

I only was a bit confused with this, because as I mentioned, I operate solely online, and all the payments go into paypal. Every Saturday, I withdraw my weekly earnings into my personal account.

Lane :

on the laptop, IF you use it 100% for business, you can actually use §179 to deduct the ful cost the year you place it in service in your business

Lane :

THen paypal is a great way to log your gross income

Lane :

gross income minus expenses = profit ... you only pay taxes on the profit

Customer:

I did play games as on it as well, but I mainly use it for business. Same as the office at home. My wife uses that computer in there to browse the internet at time, but that is where I conduct most of my business.

Lane :

The the way to go there is again, calculate what portion of the time you use it for business and factor it

Lane :

YOui MAY just want to use the 5 per fSq foot

Customer:

It would be about 80-90% used for business.

Lane :

may actually wprk out better and MUCH simple to use ... all you need is the sq footage of that designated office

Customer:

Ok, so I believe that would be an 60-80 sq foot room, so $300-$400.

Lane :

Will the 179 deduction on the lap top and the other things like ISP cosyt, etc .. may do better using the standare % of home PLUS reg business expenses

Lane :

You'll just have to sit down and work through the numbers Here's a copy of the Schedule C

Lane :

And this site has the instructions ... http://www.irs.gov/uac/Schedule-C-(Form-1040),-Profit-or-Loss-From-Business ... but if you use turbotax it will generate all this for you

Customer:

Ahh... maybe I will have to look into turbotax then.

Lane :

I'd recommend that ... If you unse the interview methid, it will even pull you through all of the home office stuff

Customer:

I really wanted to make sure I wasn't messing myself up by transfering all my paypal money to my personal account, then purchasing things from there.

Lane :

Nope... You are what the IRS calls a sole proprietopr (which s a disregarded entity) meaning there's really no separation of you and your business

Lane :

As you become more successful, you MAY want to consider an LLC or incorporating, but the schedule C just flows everything to your 1040 based on what you say is bueiness income

Customer:

Ok, great. That is reassuring.

Customer:

Lot of stuff to learn when running a business heh.

Lane :

Yep, but SO many gt all wrapped up in things before making any money at you ... Congrats this is a exc ellent IDEA

Customer:

I guess I will need to check into turbotax too, to help when I start getting to the business aspect of filing my taxes.

Lane :

yes, but the basic version will generate the schedule C for sole proprietors ... no realson to go to the higher cost editions, yet

Lane :

29 bucks I think plus a littl more to file electronically

Customer:

Ahh great. And normally, my Uncle does our taxes for us, he is a CPA as well, but he lives out of state, and I wanted to get an idea of everything, before I presented him everything.

Customer:

Didn't want to over burden him, when he has been so gracious in helping us.

Customer:

Well, I now feel more comfortable with the information you have provided me with. I greatly appreciate it.

Lane :

That's great. You could always do them and then le him check it over before you push the button and file

Lane :

NO worries, fun to see someone take an idea and turn it into a business ... You might want to expand into other areas of dispute resolution eh?

Lane :

YW, a positive rating is thanks enough ... that's how I ge credit for my work here

Lane :

Also here are a couple of articles on the ho deduction, including the IRS guidance

Customer:

Ya, you will be getting an excellent one :)

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3755
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and other Tax Specialists are ready to help you
Expert:  Lane replied 8 months ago.

Thanks much Zach!

Here's one more ... might come in handy if you do use TT (I have no association, it can just make a lot of sense for a new business owner whose not afraid of a computer):

https://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/The-Home-Office-Deduction/INF12067.html


If you'd like to work with ME again, just go here: Lane


Thanks again,
Lane

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