If you are just beginning in this business, or if you have been at it for a while but have never paid much attention to its tax implications beyond paying taxes on your revenues, this is where I get to share some very good news with you.
One of the largest and most financially powerful organizations in the world wants to help you in some very significant ways that will not only improve your business and household bottom lines, but also stand a good chance to improve your quality of life.
You guessed it. It’s the United States Internal Revenue Service that wants to help, and probably your state’s department of revenue or taxation as well. How?
Have you been deducting the business expense for the van or car that you use to schlep books around? It’s time to start.
Have you been using IRS Form 8829 to deduct the “Business Use of Your Home” cost of the garage or basement or study or extra bedroom area where your store and ship your books and otherwise run your business? It’s time to start.
Have you been deducting the expense of your book purchases at yard sales, library sales, used bookshops, and all the other places where you acquire your inventory, as well as your expenses in traveling to and fro? It’s time to start.
And what was that I said about quality of life? Well, there’s a good chance, if you are in this line of work, that you and possibly even your partner really enjoy finding out of the way used bookshops and thrift shops and whiling away the hours searching out treasures in them. From now on, please accept this encouragement to plan your future vacations around these activities whenever possible, to keep detailed notes of your book explorations along the way and to keep equally detailed records of you’re the business expenses you incur in the process. With careful planning, you will be able to stretch your vacation dollar another 20 per cent or so, and chances are it will be great for your bookselling inventory and your mental health.
Protecting Yourself
As important as it is to take the deductions you have coming as a small business owner, it is equally important to protect yourself both by making sure you keep accurate records and also by knowing what you will need if an expense or deduction is questioned by the IRS or your state taxation agency. Here are some suggestions that may save you headaches and money down the road:
· Keep in mind that, for instance, if the IRS decides to challenge your deductions for your use of your home for business purposes, it is unlikely that it will happen right away. Often such inquiries begin two or three years after the tax return in question, and in rare cases even longer. Two or three years from now your use of space for your business may be entirely different than it is now, if you even continue to operate the business! If you can’t prove to the IRS how you used the space that led to your deduction, you stand a good chance of seeing that deduction disallowed. The best way to protect yourself against such an unhappy turn of events is to take photographs of all the space in question, and keep them on hand and well-filed so that you will be able to make your case if you ever need to do so. And also keep in mind the IRS requirement that, to qualify for a home business deduction, an area of your home must have been used exclusively for business purposes.
· If you make regular donations of unwanted books to libraries, schools, or charities, you will want to be able to make deductions for those donations. You may only be donating a few books at a time, but they could well add up to a significant amount of money by the end of the year. The IRS has very specific rules covering charitable contributions, and to begin with you must obtain written acknowledgement of your contributions for the recipient organization anytime your donations to such an organization total $250 or more during a single tax year. You’ll be in much better shape if you print out a simple receipt form with blank spaces for number of books, their value (which should equal their cost to you), the date, and the recipient organization’s name, and take them with you whenever you drop off book donations at the library or anywhere else that qualifies you for a charitable contribution deduction. And you will be in even better shape if you have records to substantiate the amount that you paid for the donated books in the first place. Don’t try to get away with claims of inflated values for those mass market paperback Len Deighton novels you’ve donated because you didn’t want to sell them for a penny apiece; if you paid 25 cents each for them, that is the amount you can deduct. Appraisals and fair market values are irrelevant when you are a business owner and you acquired the material at a specific cost, and the IRS has shown an increasing interest of late in inflated donation values.
· As we’ve noted above, your “road trips” to acquire books, inspect bookstore inventories, and examine estate holdings are likely to generate considerable deductible expenses during the course of a tax year, regardless of whether they are day trips to the nearest college town or fortnights in Faulkner country. But these legitimate deductions will only hold up if you keep records showing their business purpose, cost, time, location, and who the other parties were.
· Be ready to substantiate all income and expenditures with receipts that match up with your bank deposits and expenses that are fully documented. If any of your business involves cash income or expenses, maintain complete records. And be sure to maintain business bank accounts that are completely separate from your personal accounts.
· File your tax return on time, and if you can’t file it on time be sure to file the proper paperwork for an extension. Failing to file on time or get an authorized extension increases your chance of being noticed by the IRS, and while that’s not always a bad thing, it is certainly never a good thing.
· In your zeal to claim legitimate deductions, beware of deducting so much that your household cannot possibly have survived on the remaining income. In many instances, your income level may trigger an audit. While the overall audit rate has gone down from 1989 to 1999, the IRS has been mandated to audit low-income items, most especially the earned income credit, according to a senior tax research analyst from H&R Block. So taxpayers with income that's less than $25,000 have seen an increase in audit rates over the years while the folks in the $100,000-plus cohort have seen their audit frequency drop.
Table 3: Organizing Your Business for Schedule C
Table 4: Expenses for Business Use of Your Home
Table 5: Projecting a Business Plan
