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2013

QAWarren_Body.jpgby Erin McDermott.

 

It’s tax season again. For home-based businesses, it’s time to round up receipts, invoices, and statements of a year’s worth of work from where commerce and personal life intersect. Business writer Erin McDermott recently chatted with Steven Warren, a CPA at the Minneapolis-based accounting firm Lehrman, Flom & Co., about what’s deductible for entrepreneurs who use home offices, why the risk of an audit for this group is elevated, and the importance of keeping track of what goes on in them and when.

 

EM: Home-based businesses are said to be in the highest-risk category when it comes to IRS audits, with an audit rate as high as three percent. What invites such scrutiny for this group?

SW: The IRS’s audit statistics indicate that this is an area where more incorrect reporting occurs than most due to a combination of taxpayers not understanding how to properly report their activity and intentional misreporting. [Editor’s note: See the IRS’s home-base business information pages here.] 

 

EM: What can a home-based business deduct that a business elsewhere can't? As a refresher, what is the general equation on how much of the home is used, the cost of utilities, insurance, and basic services?

SW: Home-based businesses with qualifying home offices can deduct certain direct home-office expenses and a portion of other house-related expenses. Examples of direct home-office expenses can include office furniture, a dedicated business phone line, and office supplies. Examples of indirect expenses that are deductible based on the size of the office [relative] to the entire home can include depreciation on the home, homeowners insurance, utilities, cleaning service fees, and monthly security system maintenance fees.

 

Certain types of businesses can have more generous rules apply, such as licensed day-care providers.

 

EM: For most businesses, the tax accountant relationship is a year-round dialogue. During 2012, have you seen rule changes that have come as a surprise for home-based business clients? Anything that may prove a curveball?

SW: There are no new curveballs specific to home-based businesses for 2012 income tax returns. One new item that came as a surprise that affects many home-based and non-home-based business owners is the expansion of the self-employed health insurance deduction as it applies to Medicare premiums, along with the strict procedural requirements that must be followed to qualify for the deduction. Notably, there is a requirement that either the business must pay the premiums directly or the business must reimburse the business owner for premiums paid. [Here’s the IRS’s new instructions.]

 

EM: For home-based businesses buying, say, a laptop, there’s the hurdle of proving it is exclusively for business use. Realistically, here in the age of social media and various online distractions for even the most dedicated entrepreneur, how can you prove or catalog that exclusive use to allow for that deduction? How is today’s Wifi-enabled “work-anywhere” environment translating with this deduction?

SW: You don’t necessarily need to prove exclusive use, but the recordkeeping requirements can be onerous depending on the type of asset in question. For a laptop computer, under audit the IRS would like to see a usage log that demonstrates personal versus business use. This can be done on a sample basis with the ratio during the sample period applied to the remainder of the year when the use throughout the year is fairly consistent.

 

QAWarren_PQ.jpgEM: Home-based businesses face a special challenge when it comes to advertising and promotions—being located in a residential district and not a commercial one makes them somewhat invisible. How does that deduction work and what should those owners keep in mind?

SW: Generally, advertising and promotions are fully deductible. When meals and entertainment, gift giving, and the taxpayer’s personal use or enjoyment of the promotion occur, the rules become more complex and the deductions are often limited.

 

EM: You’ve no doubt seen all kinds of organizational skills (and lack thereof) when it comes to clients’ receipts and recordkeeping. With home-based businesses, this paperwork is even more critical to proving expenses. What have you seen that works? How do you suggest wayward clients get it together? Is technology helping?

SW: The best method for recordkeeping will differ based on a taxpayer’s specific situation. When there is very little activity, a handwritten journal may be adequate, but tracking in spreadsheet software will normally work better. As the business grows and activity increases, switching to accounting software is generally preferable. For some businesses, accounting software is essential. If the business owner does not have the time or ability to work with the software, hiring a bookkeeper may be the way to go. Being organized and keeping up with entries throughout the year can save much time and frustration around tax time versus scrambling to put everything together later.

 

Business owners should keep their business activity separate from their personal activity. For example, separate checking accounts and credit cards should be maintained.

 

Disclaimer: The opinions expressed are solely those of the interviewee.  As always, you should review the advice of a qualified CPA, tax advisor, financial planner, or other professional prior to changing your tax strategy, recordkeeping structure, or making other major financial decisions.

QAchristycook_Body.jpgby Heather Chaet.

 

“You know what? The world needs a [insert that fantastic idea about a product here]!” We’ve all said it, heard a spouse say it, or listened to a friend talk about that next great innovation or product. Yet not many go from a brainstorming, off-the-cuff chat to taking the steps necessary to launch a company. Christy Cook, founder of Teach My, a line of award-winning learning kits for babies and toddlers, did just that, however. She saw there was void in the educational toy marketplace and turned her homemade solution into a successful business. Today, her Teach My products are sold on Toysrus.com, Walmart.com and other major online retailers, and she’s cracked the code to creating product awareness, having been mentioned everywhere from The Huffington Post to “The View.” Business and parenting writer Heather Chaet found out how this “mompreneur” transformed her idea into a thriving brand.

 

HC: Your company, Teach My, began because you couldn’t find a basic, all-in-one teaching kit for your son. Tell me about your “light bulb” moment.

CC: When my son was 18 months old, I wanted to teach him the basics. I began going to education supply stores to find teaching tools. I was hoping for one kit that would have tools to teach the alphabet, numbers up to 10, colors, and shapes. I didn’t find one, so I bought several tools that were expensive and outdated in style. I played “Mama’s School” with my son, and [used] the teaching tools for 20 to 30 minutes a day. By the age of three, my son could read, which caught the attention of parents at nursery school and playgroups. I realized there was a gap in the market and knew that other parents would benefit from an all-in-one learning kit. So, I created Teach My Toddler.

 

HC: What next steps did you take to turn that germ of an idea into a business?

CC: It took six months from the time I decided to move forward with the idea to actually going into production. I tested a prototype on many moms’ groups in my local area. The testing process didn’t have to be rigorous because [similar] products exist in the marketplace already. We updated them, made them more stylish, and put them all in one kit. I like to call it “evolution not revolution.” I spent a lot of time looking for overseas suppliers, trademarking the name, and setting up a business—thank goodness for Google! I manufactured 1,000 kits and exhibited at a local consumer show, [selling] 90 kits in just three days.

 

HC: What obstacles did you encounter as you built your company? Any that surprised you?

CC: I was surprised by how difficult it has been to build relationships and connect with store buyers. Buyers are a tricky breed. When working with buyers, you need to be prepared to take criticism and grow your product line accordingly. I needed to ‘check my ego at the door.’ The buying process can take up to six months to get underway, and there are long approval processes and many forms to fill in to become a vendor with large corporations. [It takes] a lot of persistence—a key trait for every entrepreneur—and patience. 

 

QAchristycook_PQ.jpgHC: Describe your first triumph as a small business owner.

CC: In 2009, at our first New York Toy Fair, a top buyer from Toysrus.com came by our booth and loved the products. He was instrumental in championing the products at Toysrus.com in the early days. He gave us great placement on the website in our early days. This alone created amazing sales numbers and exposure, and [I was able to use] the sales figures to attract the attention of other big box online retailers.

 

HC: Do you collaborate with other small business owners?

CC: I work with lots of small business owners. In the early days, it is important to find a group of business owners at the same stage. We collaborate on social media efforts and giveaways, and share contacts and stories.

 

HC: Your Teach My products have been mentioned on top parenting web sites and national talk shows. Any advice on attracting that ever-important word-of-mouth “buzz”?

CC: If nobody knows about your product, it will not sell. My corporate background was in marketing and public relations, and [I’m] thankful for my public relations experience. Public relations is an essential part of launching any product and also important to keep it on the market. In the “old days,” marketing professionals said that a brand or product had to be seen by a potential customer seven times before they would consider buying. Due to all the noise in the current marketplace, that number has increased 10-fold. Now, it’s essential to build “layers of awareness.” Using both traditional media (TV, radio and print), as well as non-traditional media (Facebook, Twitter, Pinterest, Youtube, Google+ and blogging), build layer upon layer of awareness by getting your story out to the public at every possible opportunity. Through building the layers of exposure, customers will be able to find you among all of the other brands.

 

HC: What are one or two other tips to get a product noticed?

CC: Tradeshows are key. They put your company in front of hundreds of buyers over a course of three or four days. I also think a professional image is important.  [From my days] in public relations, I knew the importance of image. Although you are a small company, you need to look and think like the big guys.  Therefore, we invested in a great website, a stand-out tradeshow booth and high quality sales materials to represent the brand. 

 

HC: Many of us dream up ideas for products or companies, but rarely follow through with it. Share your thoughts on what others need to keep in mind before they begin a venture like this.

CC: [Ask yourself] do you have money and passion? Unfortunately, start-up businesses take more money than anyone ever expects. Be prepared to invest or find investors. We have private investors in the form of friends and family. Also, you need to have a relentless amount of passion—don’t listen to the naysayers, and don’t ever give up on your dream.

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