"I work fulltime and just started a home based business in November. I have not earned any money from this but do have some expenses, like starter fees, books, leads, ect.. that total about $500.00. Am I eligible for to claim these expenses on my taxes this year and if so, what form do I use since I usually just use the 1040EZ form, since I usually just have a W-2."Congratulations on starting a side business! This is by far one of the best ways to earn extra income and work for yourself. Starting a business is also a smart tax move, because you can deduct all your "ordinary and necessary" business expenses. You will be taxed only on your net business income -- the profit left over after expenses.
You will report your business income and expenses on Schedule C. If you have net profits left over after all your expenses, you will fill out Schedule SE to figure your self-employment income -- this is Medicare and Social Security tax for self-employed individuals. All of these extra schedules means you get to fill out the Form 1040. That's right, you can no longer use the shorter 1040EZ or 1040A.
You will want to read over my article on Tax Tips for Freelance Professionals. I provide an overview of Schedule C, deducting the cost of your home office, and how to protect any losses you might have. Losing money? Many new business ventures often lose money in their first year because the owner spent more than she made. Losses are valuable at tax time, but you'll want to make sure you keep your receipts and other documents well-organized just in case the IRS has any questions.
Most people ask what's an allowable business expense. The short answer -- and the vaguest answer -- is that all "ordinary and necessary expenses" are deductible against your business income. This, of course, does little to answer the question whether your expenses are ordinary and necessary. Fortunately, the IRS has published a great summary about business expenses on their Web site, and provides examples of common expenses that business owners can claim.
Do you have a tax question? Visit the Ask a Tax Question page. Disagree with my answers? Post your comments in the Tax Forum.
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