If you use your home in conducting your business, such as a daycare, you might be able to deduct some home-related expenses as business expenses, including:

• Depreciation
• Utilities
• Repairs

To claim expenses for business use of your home, you need to use some part of your home exclusively and regularly as 1 of these:

• Your principal place of business
• Place of business you use to meet or deal with these people in the normal course of your business:
• Patients
• Clients
• Customers
• The only fixed location where you conduct substantial administrative or management activities.
  Ex: You can claim home-related business expenses if you don't use your home's business space for any other purpose and:
  • You run a hair salon in your home.
  • You're a consultant and meet with clients regularly in your home.
  • You're a real-estate broker. And though you spend most of your time visiting properties and meeting with buyers and sellers in other locations, your home office is the only place you:
    • Use your business's desktop computer and other business equipment
    • Maintain your business records
    • Conduct other administrative activities for your business

You can deduct home-related expenses when the exclusive-use requirement doesn't apply in these situations:

• You conduct your home business from a structure, like a detached garage, that's separate from your home.
• You run a home daycare.
• Your store inventory or samples in your home and:
• Your home is the only fixed location of your business.
• The space is a separately identifiable space suitable for storage.

We'll take care of Form 8829: Expenses for Business Use of Your Home to determine your eligible deductions and amounts. See IRS Publication 587 to learn more.

Keep complete and accurate books and records to:

• Prove your business activity
• Establish your business is a trade or business conducted with a reasonable expectation of making a profit

Suggestions for keeping accurate books and records:

• Maintain a separate bank account for your business income and expenses. Keep copies of your bank statements and deposit and check registers.
• Keep receipts for each purchase made detailing:
• Amount spent
• Description of the item purchased
• Purchase date
• Record your receipts and expenses in a ledger or small-business bookkeeping software.
• Keep a paper or electronic journal of cash expenditures and receipts.
• Keep a log of your business auto mileage and out-of-pocket travel and transportation costs, like tolls and parking fees.
• Maintain a written business plan and an annual or quarterly budget.
• If your business includes inventory, keep detailed records of purchases and sales. Take a physical count of your inventory at year end.
• If relevant to your business, keep these items to fully document the nature of your activities to support your business expenses:
• Logs needed besides transportation logs
• Schedules
• Payroll records
• Sales contracts

See IRS Publication 583 to learn more.

You can't deduct losses from your business if your business doesn't have a reasonable expectation of being profitable. If your activity doesn't qualify as a true trade or business, related deductions are limited. Your situation's facts and circumstances determine if your activity is for-profit or just a hobby.

If your business shows a profit in at least 3 of the last 5 years, the IRS presumes your activity is conducted with the intention to make a profit. If you don't meet this standard, the IRS considers these questions to determine if you're involved in the activity for profit or as a hobby:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• Are losses due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Do you expect to make a profit in the future from the appreciation of assets used in the activity?
• Is there an element of pleasure or recreation in the activity?

You can't use losses from an activity to reduce your other income if your activity:

• Isn't profitable
• Is considered a hobby rather than a trade or business

You can only claim deductions for such an activity on Schedule A. The deductions are limited based on the type of expense.

Hobby-loss rules usually apply when you participate in distribution activities to get product discounts - and not just with the intent to earn profit. Ex: Hobby-loss rules apply if you sell these products mainly to get them for personal use:

• Avon
• Mary Kay
• Tupperware

See IRS Publication 535 to learn more.

If you own and operate your business jointly with your spouse, you might qualify for taxation as a qualified joint venture:

• You don't have to file a partnership return for your activity.
• You and your spouse each must file a separate Schedule C reporting your share of all the businesses':
  • Income
  • Gain or loss
  • Deductions
• You'll each receive an earnings credit for Social Security and Medicare purposes.

You can file as a qualified joint venture if you and your spouse:

• Are the only members of your joint venture
• Both materially participate in the business
• File a joint return
• Both elect not to be treated as a partnership

go to www.irs.gov or see Schedule C instructions to learn more.

The accounting method you choose must reflect your trade or business income. Most small businesses with less than $5 million in annual sales usually choose 1 of these methods:

• Cash
• Accrual
• Special methods of accounting for certain types of income and expenses
• Hybrid - a combination of methods

After you begin using a method, you can't change methods without requesting permission from the IRS via Form 3115: Application for Change in Accounting Method.

Cash Method - Most taxpayers use the cash receipts and disbursements method of accounting. If you choose this method, include income in the year you receive it and deduct expenses in the year you pay for them.
Ex:

• You billed a customer in November 2010. The customer paid you in January 2011. Report the income on your 2011 return.
• A contractor billed you in December 2010. You paid the bill in January 2011. Deduct the expense on your 2011 return.

Accrual Method - Under the accrual method of accounting, report income in the year you earn it. You deduct expenses when you incur them - not when you pay them.
Ex:

• You billed a customer in November 2010. The customer paid you in January 2011. Report the income on your 2010 return.
• A contractor billed you in December 2010. You paid the bill in January 2011. Deduct the expense on your 2010 return.

• Sales are more than $5 million a year.
• You keep an inventory of items to sell to the public, and sales are more than $1 million a year.

Hybrid method - This is a combination of cash, accrual, and special methods of accounting. You can only use a hybrid method if it accurately reflects your income.

Under Section 179, a small business owner can deduct 100% of eligible purchases in the year purchased. The owner can do this instead of depreciating the costs over several years.

Eligible purchases include:

• Computers
• Equipment
• Machinery
• Furniture
• Off-the-shelf software

In 2010, you can deduct up to $500,000 under Section 179.

Ex: Josh purchases office furniture for $7,000 in 2010. He can claim a $7,000 Section 179 deduction in 2010. If he doesn't claim a Section 179 deduction, he'll take a $1,000 depreciation deduction each year for 7 years.

The deduction is reported on Form 4562: Depreciation and Amortization.

If you're self-employed, you might qualify to deduct 100% of health-insurance premiums you paid for yourself, your spouse, and your dependents.

To qualify for this deduction:

• You have to report a net profit from your trade or business
• Neither you nor your spouse qualified to participate in a employer-subsidized health plan.

You can deduct up to the amount of your net profit from your business.

You don't need to pay FICA (Social Security and Medicare taxes) or FUTA (federal unemployment taxes) on wages you pay your son or daughter if the child:

• Is under age 18
• Performed services for your business

Your deduction for wages paid to your children can't be more than what's considered reasonable compensation based upon the work that's performed.

Employing your child can help lower both total income and employment taxes if your child is in a lower tax bracket than you.

Ex: Kevin is in the 15% tax bracket and pays his 17-year-old $3,000 to work for him during summer vacation. So, his business income is reduced by $3,000, cutting his taxes by:

• $450 in income tax
• $314 in self-employment tax

If his child has no other income, the $3,000 will be tax-free - even if he claims his child as a dependent.