Not too long ago I sold my decorating business to two younger women who had been decorating residential property.   We had become friends and it seemed the right thing to do at just the perfect time for me.  I stayed on as a consultant to help them with my books and client list.   The most important aspect of transitioning for them was a good understanding of the taxes they would be responsible for.   I had over 300 fabric books, etc. which had already been purchased by me.   I had a system in place for  automatic discounts to my customers.  Part of the deal was that they were to continue with those discounts for certain customers.     Keeping good records is the key to supporting all tax deductions.   It can get complicated because you have the designer’s cost, the mark up and then the profit.    They also took over my showroom lease and sample furniture and accessories.   We had to come up with a depreciation price on those items so that I could take the deductions against the profit made from selling the business.    It wasn’t complicated but it was tedious, important work to avoid excessive taxes from saving gasoline receipts, lunches out with clients, utilities, workroom fees, sales taxes, etc and oh those quarterly income taxes! 

I "use" to have a slew of side businesses, now I don’t. One job, one focus. I have made a conscious choice to streamline and reduce my life in every way. From work, to where I live, how I live…everything about the economy has affected me. I would say for the best.

On the subject of tax write-offs, I think EVERYONE who pays taxes needs to know what the federal government allows and doesn’t allow as a deduction. Even if you don’t own your own company, as a home owner you are privy to a slew of write-offs. No offense to Erin (and I really do mean that) you can get information all over the Internet about possible deductions, but my advice to everyone is always check the IRS.gov site before attempting to include them on your taxes.

People decry government all day and everyday, but I personally reference all their websites on a regular basis. I do so because I trust what I am reading and I want to stay informed.

Generally good advice, especially about keeping good records, even though it’s not fun. I’ve been a tax preparer more than 15 years, and the IRS is stepping up audits of self-employed people. 

Watch out about just writing off new equipment using Section 179 instead of depreciating it over the years.  Often, if a business is just starting, you may not have that much income to offset, and you’d be better off having some of that new equipment expense to write off in future years.  Also, every type of equipment is given a "useful life" listed on charts by the IRS. For example, computers are "3 year property", office furniture is "7 year" etc.  If you get rid of your equipment before its official "useful life", either by selling it, converting it to personal use, etc., you will have to "recapture" some of that excess depreciation you took by writing all the expense off in that first year by using the section 179.  That means: the difference between what the depreciation schedule allows and that entire amount you wrote off with 179 the first year will count as INCOME to you now.  It can be a nasty surprise.

Mileage is a great deduction and it’s a good idea to have a notebook in the glove compartment.  But, unless you have your office in your home, the business mileage doesn’t start until you go from your office to your first client, or to the store for business supplies, etc.  Also, the trip from your office back home does not count. Those are commute miles and don’t count for anyone, although you should know how many you drive because the tax forms ask you: total miles driven in the year, commute miles, business miles and personal miles. Miles really do add up, and it’s a shame not to keep track and then deprive yourself of legitimate deductions.

If record-keeping is not your strong suit, it pays to hire a bookkeeper to help get or keep your receipts etc. in order.  You need dates, amounts, mileage, etc. for your taxes, and to prove your expenses to the IRS.

Another thought — the money you earn is not all yours.  Besides income tax, which may be low if your earnings are low, you will owe Social Security tax of about 15.3% on all earnings over $400. So, I’ve seen many clients with no income tax owed, due to credits, etc., but who owed maybe $1800 Social Security tax and they’re shocked. 

A good idea is to ask a tax advisor a bunch of questions before you start up your business. It can be done very successfully with a bit of planning and record-keeping. Good luck!

I trust those of you with employees are particularly careful with your payroll records and make timely payroll tax deposits as required for your particular situation.  A cautionary tale:  some time ago, a friend of mine who ran a small but very lucrative bakery with just a handful of employees, was haphazard at best in keeping records of any kind.  She worked so hard and paid her employees faithfully, deducted Federal and State Withholding, and FICA, but somehow just never got around to filing reports or making deposits the whole time her business was operational.  For some reason, she just didn’t seem to "get it." 

The IRS became involved when she was unable to issue any of her employees a W2, and they reported her.  She was closed down, and eventually lost her business…just as it was beginning to really take off.  A real shame, and a totally unnecessary and avoidable loss.   

I have been self-employed for 25 years.  Not always full time, but was never shy about checking on what can be deducted.  My tax man sends me updates and I email him and check the govt sites to see what is new or what they have taken away.  The medical deductions can get complicated sometimes because I use alternative medicine.  We have our accounts set up so that  our health insurance is deducted.  We design and build so I can deduct many great publications that we use to help them with ideas.  Car deductions get complicated because I work at home but no longer deduct my home office because when they gave us the chance to opt out of it, I did.  

I am pretty up on payroll and work comp.  Since our work is considered fine artisan there are many odd things we have to use in the creative process - one of our clients like their cabinets lined with velvet - hence trips to fabric stores.  Just have to be able to prove what you use as materials.

If you donate anything to a thrift store (Good Will etc) make sure you photograph it for your files.  The IRS sometimes asks you to prove with photos.  I will donate old stock, and we have things in the shop that we cycle out after a couple years of no use - like hardware.

Yes I know about he coffee filters and a lot more, and we take everything the law allows us.  The hard part is the paper.  There are so many receipts and bills of lading I feel like I am buried in paper most of the time.  THere is a "keeper of the keys" and there are paper keepers.  Sometimes the paper feels like an avalanche. 

I agree with what commenter Bonnie Schuster said earlier, you must be able to legitimately back up deductions.  Not so creative, but we do support charities financially.

However, we work with several businesses who are finding ways to save on taxes and double taxation by incorporating or forming an LLC.  You can visit our site, www.corpnet.com, for more information.