So a couple weeks ago I sat down to get our tax situation figured out for 2011. We decided to go with a chartered account to file all of the paperwork for us. It actually worked out pretty well since he needed a website made for him and one of us (I’ll leave it up to you to guess) is pretty good at doing that sort of thing. As a bonus for future years, we found out that since we are now a registered business, we can deduct the costs of having someone do our books, from the revenue of the business itself. If we assume our marginal tax rate is somewhere around 35-40%, this basically means that the tax preparation really only costs us less than 2/3 of the sticker price. Anyway, I had done my own taxes in the past (I still recommend trying your hand at this process if your return is fairly straight forward), but I wanted someone who was sure they knew what they were doing since we had to include business-related stuff this time around.
I had never really paid attention to all the deductions that businesses were allowed to make since it never affected me before. I was vaguely aware that my dad “wrote-off” quite a few things with his lumber business when I was young, but I didn’t really understand just how extensive tax deductions can be for a business. Now I should say right up front that I am definitely no tax expert, I don’t play one on TV (or on my blog) and I didn’t even stay at a Holiday Inn Express last night, so take my opinions and thoughts for what they are worth.
Running A Blog Costs More Than I Thought
After adding up all our revenues and immediate costs related to the business (stuff like hosting, design help, contract work, software, internet costs etc.) I thought we would likely break even for 2011; however, after learning all the expenses I was allowed to claim against our revenues, I was never so happy to report that I had “lost” quite a bit of a money. So for our first year in business, we are claiming a business loss! The main aspect of these deductions that I was not aware of was all of the home expenses that we are able to deduct. The basic idea is that if you conduct more than 50% of your business from home, you are allowed to claim many different business costs such as rent, mortgage (sans interest), home insurance costs, utilities from your taxes. The percentage of these costs you are allowed to deduct is based on the square footage of your home office as a percentage of the overall square footage in your house. Now I know why so many people try to create fraudulent businesses – they could be quite lucrative!
Now hopefully this will be the only year that we claim a loss for our business. I definitely plan on our business making substantially more in 2012. One of the only large benefits to being a registered general partnership business is that you can deduct business losses from your other income. In the case of JB and I, we both have pretty decent jobs and fairly high marginal tax rates. Every dollar that we lost in 2011 on our business is 30 cents or so of savings in our pockets come tax return time. Now if we were incorporated, that is another ball of wax, and the tax treatment would be much different.
To Deduct, or Not To Deduct – That Is The Question
The flip side claiming this loss of course, is that the government takes a closer look at you and your tax situation and that infamous term comes into play – tax audit. I have only heard terrible things about this scenario, but I think we have a small enough business that it should be pretty simple even if “our number comes up.” Also, from what I heard and read, the chances of you having an audit done go up dramatically if your business continues to incur losses for several years running. This makes sense, as otherwise I’m sure lawyers would be advising everyone to open a random business so that they could subtract home costs from income taxes. That being said, I have to believe that initial start-up costs in your original year, and your meagre initial revenues would probably be looked at different than a company posting large losses for its 4th straight year or something along those lines. I guess we’ll find out soon… maybe you’ll soon be treated to a post about the joys of being audited!
Any other tips from people who have owned small businesses for a while or went through the audit process?