Monday, February 12, 2007

Bloggers, designers, inventors: 3 Ways to Expand Business Deductions

Because of my most recent posts I've had a bunch of questions on business expenses in general. I think this will answer a lot of questions. And I hope it encourages you to ask some questions of your tax pro.

Common sense – you know, that’s the commodity your mother wished you had – would tell you that business expenses are the costs you incur to run your business – the money you must spend in order to make money.

The IRS explains it this way
“To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is appropriate and helpful for your business. An expense does not have to be indispensable to be considered necessary.”

Okay, but what's an ordinary expense to a blogger? What's a necessary expense to a computer games inventor?

The answer: Anything you do that relates to your work, that stimulates or enhances your business, nurtures your professional creativity, improves your skills, wins you recognition, or increases your chances of making a sale is a potential business expense and deductible.

When Victor Visual attends a friend's talk on web marketing, that isn’t a personal experience for graphic designer, Victor. Even though he may attend as support for his friend, it's business and any related costs are business expenses, and deductible. It’s just as legitimate a deduction as that paid by a salaried middle management executive attending a seminar given by his colleague on “Employee Motivation."

Ivan Inventor – of computer games, that is – shouldn’t assume that buying someone else’s computer game can’t be a business expense. Even if Ivan stayed up half the night fighting invaders from another galaxy, he was researching the competition. The purchase of the game is a business deduction.

Whether you blog or design or invent, if you're doing it to make money: You are self-employed – so from this moment on, whenever you reach into your pocket for money, write a check, or slip out your credit card, be aware that you may be engaging in a business transaction.

Here's 3 Ways to expand your business deductions:

1. Define your business as broadly as you honestly can. The more multi-faceted and inclusive your field of endeavor the more wide-ranging your expenses and thereby the less taxes you’ll end up paying!
  • A photojournalist can deduct a more extensive variety of expenses than can a wedding photographer.
  • A technological consultant’s expenses will be more diverse than those of a computer repair person
2. Look with a different perspective at your activities. Don’t be so sure that there is a well-marked difference between work and family and play and chores. The business life of an indie like yourself is intertwined with your personal life. And the two two can get pretty tangled. If you’re dropping off your children while delivering products to clients, or struggling to find time for your new independent venture while holding down a full-time job, the interplay of your business and other interests can be intricate.
  • A visual artist attends a Broadway performance and scrutinizes the sets and costumes. She deducts the cost of the ticket as a business study expense.
  • The designer of hand-made all-cotton clothes for children deducts, as a publication expense, every magazine she purchases that has any clothing, kids, or fabric industry trends in it.
3. Review your relationship to the people you spend your time with. Anyone who has a connection with your business may be primarily a business associate even though in some cases he or she may also happen to be a college classmate, friend, parent, child, or spouse. Friendship with a business associate is not necessarily fatal to a deduction. You’ll just have to show that the predominant motive for the activity that warranted the expense was business-related.
  • Faye Fabrique deducts not only the fabric paints that she buys, but also the expense of dining out with her husband. Why? Because during the meal she gets his advice on questions of scheduling, picks his brain about various proposals, and tests his reaction to her brochure. She could not have had this business discussion at the family dinner table with her three children in attendance and so the gift given to her brother as thanks for baby-sitting while she was at this dinner is also a business expense.
Think like a business. Take every deduction possible. And, click here to get your complimentary list of self-employed business deductions?
As always, read the book that can simplify your tax and financial life, AND save you money!

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