Tax Tip #2: Home is Where the Profit is March 8, 2008

If you’re like me and you have the smallest of small businesses (i.e. the home office), you’re probably hoping to take a nice, juicy deduction for the portion of your rent and utilities that goes towards supporting your home office. Do you want the good news or the bad news first?

Alright, first the bad news: if the income you made working for yourself is less than your total expenses for the year, including the home office portion of your rent and utilities, you cannot take this deduction. In other words, the IRS will not let you deduct the office portion of your home if it operates at a loss. In my case, because I was teaching for most of 2007, I was an employee during those months and not working for myself. Nevertheless, I was also starting a business, so my expenses for the year were about $2,000 more than the income I made working for myself rather than for the school.

Okay, now the good news: the home office deduction rolls over from year to year until your self-employment income exceeds your expenses. That means that in 2008, assuming my business makes a tidy profit, I can deduct the rent and utilities for my home office from 2008 and 2007!

In short, if you have a home office that eventually makes some money you will get your deduction, just maybe not right away. Be careful about the size of the refund you are expecting this year, especially if you started your business in 2007 or finally took it full-time.

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Getting an EIN: the Easiest Part of Starting a Business January 12, 2008

If you’re a sole proprietorship, you need an EIN.  Well, legally you don’t need one, but in a world full of identity thieves, isn’t it nice to be able to keep you social security number to yourself?  As a new business owner, an enormous number of people are asking for it these days. I find it really disconcerting to have to write it on every bank, credit, shipping and merchant service application I fill out.

An EIN, or Employer Identification Number, otherwise known as a Federal Tax ID, does not actually require you to employ anyone to get it. In fact, it’s so easy to get, you’d be a fool not to do it right now.  All you have to do is visit the EIN page on the IRS’s website.  You can apply in five minutes online (though only during certain hours–I have no idea why), and be instantly approved.  You just print your identification page at the end of the process and you can start using it immediately for almost anything (you have to wait two weeks before using it to file your taxes).  The best part?  It doesn’t cost a dime.

One small note: an EIN is not what will allow you buy things wholesale, at least not in the state of California.  For that you need a seller’s permit, which is a whole other kettle of fish, and is the same document that you need to collect sales tax.  This requires more time and money than getting an EIN.