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I operate a business, where I create letters, following a specific

set of instructions, for my...
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.
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11/14/2013
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,855
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified

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
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,855
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified
Lane and 87 other Tax Specialists are ready to help you
Ask your own question now

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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Lane
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,855
12,855 Satisfied Customers
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986

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