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How to Avoid Being Targeted by the IRS in Your Home-Based Business!

If you run a home-based business, you might be confused about what you can and cannot deduct as reasonable expenses. Some home-based businesses make critical mistakes and are red-flagged by the Internal Revenue Service. However, with a little guidance, you can start a business that will stay under the radar and keep you out of hot water:

Understand home office deductions. While you don’t have to have a separate room as a home office, the area you use must be used exclusively for conducting business. This includes a place where you meet clients, patients, or customers. You can also claim a home office deduction if you store inventory for your business. In the strictest sense of the word, a home office cannot include personal items, such as personal mail, your children’s toys, etc.

Incorporate your business. The IRS keeps an eye on home-based businesses. In fact, sole proprietorships, especially those that are home based business owners, are more frequently audited than corporations. One tactic that you can use to decrease your chance of an audit is to incorporate (form an LLC or corporation) your business. Incorporated businesses are audited far less frequently than home-based businesses. The IRS is more likely to question deductions in a home environment than a corporate setting.

Keep separate bank accounts for personal and business use. One of the biggest mistakes that small businesses make is to combine both personal and business expenses. Keep separate accounts for personal and business use. In case of an audit, it’s much easier to refer to an account that is used for one purpose than to wade through 12 months of personal and business expenses and attempt to separate them.

Deductions should be reasonable for your business. Avoid extravagant deductions. Another red flag for you home business is when the deductions are high in comparison to your income or the industry norm. Obviously, you’ll have deductions, but over-the-top claims will catch the eye of the IRS. If you have large deductions, keep the proof on file for at least three years.

Use specific amounts. Most costs don’t end in rounded numbers. Be specific. Rounded numbers imply estimates, and this could flag your business for an audit. Also, if you believe that a deduction will flag you for an audit, attach proof to substantiate your claim.
File online. Math errors are another audit magnet. While one small error probably won’t create a problem, multiple errors will most likely bring attention to your business. When you file online, the software will do the math for you, eliminating the margin of error.
Don’t underreport earnings. Keep in mind that in this technological age, the IRS can easily find your earnings. Don’t be tempted to underreport your income, or you could find yourself at the losing end of an audit.

Run your business like a business, not a hobby!  Use some type of accounting software to track your monthly revenue and expenses so you can track your profit and loss. Running your business based upon your online checking account balance and “let’s just see how it goes,” sounds more like a hobby to the IRS vs. a real business.

Operating a home-based venture is a rewarding experience and doesn’t have to create IRS headaches. Know the tax laws, keep good records, and your home business will thrive. For more information about what you can and cannot deduct as a business expense, go to the Internal Revenue website and download Publication 587: Business Use of Your Home.

Prioritizing Business Needs

Many of my clients, these days, are looking to me to help them find new ways to do what they do and to reach out to their clients. They tell me that the sales process is getting longer, they need to make various cuts and that they cannot depend on their steady cash flow to bring in the clients they are used to serving.

Of course, in a recession, this is no surprise. The problem isn’t about recognizing the problem, it’s about working through the solution.

One of the biggest questions is around “where to begin.” That’s one of those questions that makes you kind of laugh and think to yourself…man…if it was that easy! The question is…do I market more…do I let people go…do I change my product offerings…do I…and how do I know what to do, and when?!

Well, the majority of the answer comes from knowing your business. While this exercise isn’t a “quick and dirty fix” that will turn things around for your organization, it is an exercise that all business owners need to incorporate into their business model. There are 3 internal considerations and 2 external. The first thing that I must suggest to you, however, is to get out of panic mode. In panic mode, most business owners cannot make good decisions. Decisions tend to be reactionary and serve the moment. They often do not result in long-lasting positive change for the organization.

Be clear, on the other hand, that your business cannot survive in planning mode. Quite the dichotomy. However, as a leader, you must learn and be clear on the time to plan versus the time to make informed decisions.

The exercise:

- What are the basic things your business needs to survive every day? The first thing many business owners will say is cash flow. Well, cash flow is more like “blood.” Blood has no purpose without a being. So, let’s look at some alternatives:

- Clear, transferable belief statements – your mission, vision and values. No excuses. If you don’t know why you exist, who you serve and know where you are headed, you’ll get no where, fast.

- Leadership – leadership will drive the beliefs. The business owner doesn’t necessarily need to be that person. Not everyone is gifted with the ability to lead, though most of us are gifted with the ability to dream. Be very clear on that.

- Market – While selling ocean water to fish might be appealing in a great economy – there will be fringe purchasers who might splurge periodically, in a tough economy, 99% of your purchasers are going to come from a specific market; your fringe purchasers will be focusing on their own needs. Therefore, you’ve got to be crystal clear on who your market is, where they live, what they do, their purchasing habits, etc.

- What are the things that will allow the business to continue operating from day to day?

- Consider – an effective sales medium

- Required (be clear on “required” versus “desired” resources – cash flow, personnel, production capability,

- Processes – how to get things done and efficiently as possible

- SWOT awareness – knowledge of what makes you great, what areas you need to strengthen or work around, things in the marketplace that could hurt your business and marketplace situations of which you could take advantage.

- Management – the assurance that day-to-day activities are being carried out properly – the right people or products at the right place at the right time in the right condition

- What is your relationship with your stakeholders? Who are they? How are you serving them? How are they serving you? What is your messaging for each group?

- Customers – the people you hope to do business with. Much of your marketing and advertising efforts will be focused on them. However, in a tough economy, it’s more than traditional advertising: it’s assurances, demonstrated capability, track record, recommendations and testimonials

- Vendors – who your vendors are and your relationship to them is part of your branding strategy. For example, if you are an eco-friendly company, and one of your vendors is known for dumping raw wastes illegally, or is a major producer of waste, you are not providing a consistent message. How does this effect your business? Your other stakeholders may have some influence over each other’s purchasing decisions (think community, customers…)

- Community – how your community views you is going to be a major indicator of how successful or unsuccessful in your business. A business that is well received, regularly gives back and participates in community events is going to be received much better than those that don’t. Keep in mind the difference between participating in the community and shameless self-promotion at community events: one serves the community, the other serves the self. Guess which one will be better received?

- Team – consider your team not as employees, but as people who are bring their gifts, talents and abilities to share in reaching the vision for your organization. They should be able to take ownership of company beliefs, and interested in moving objectives forward on your behalf. Your relationship with them should be synergistic, meaning that when you put two of them together, you should get far more productivity and results than you would get from either one of them, or from each of them working independently. These types of relationships are those that you must really nurture and develop in order for everyone to reap the benefits from.

- Network – as Debbie Rodkin of Re:Focus on Careers would say, “It’s not about who you know. It’s about who knows you!” Leveraging the relationships you build during your networking endeavors is a powerful force for your organization. Don’t underestimate it. Remember – people most often do business with people.

- What do people think about your company – or you, if you are the company – when they think about it? How do they envision your company?

- Is your company’s messaging accurate? Does it clearly and accurately establish your company’s expertise?

- Does everything in your company express that idea or message that you are getting across to your stakeholders?

- Does your company logo/collateral help or hurt your company?

- Does your team help to express your company beliefs? Do you take the time to train them on how to? Do you realize that there are some people you may need to let go in order to maintain the integrity of your brand if you find that you cannot get them on board?

- Does the way you interact with your stakeholders – vendors, team, community, customers and network further help or hurt your brand?

- Do you have any brand management strategies?

- Do you have a perpetual, purposeful marketing strategy?

- Do you have a plan for growing the organization? Growing the organization may or may not be the last thing on your mind, right now, but consider the following:

- If you are effectively managing the items mentioned above, you should be stable and possibly capturing a larger portion of the market than some of your direct competition. Some business owners are realizing that they don’t have the “rounded out” skill sets required to run a business on their own. You may be in a position to partner with or purchase one of these struggling businesses that are aligned with your organization (beliefs, stakeholders, market, products & services), which could further your business and relieve another business owner.

- The current economic conditions won’t last forever. Where do you intend to emerge? What are your contingency plans?

- What are your indicators of change – as in, those things that have to occur in order for you to take certain steps. For example, if your customer base drops below a certain levels, do you expand your marketing? cut prices? enhance positioning? What if the base expands? When do you increase capacity? How do you know if the expansion is sustainable? Having a plan for what to do next is going to keep you from making those gut-level decisions that are often like using an axe when a scalpel would have sufficed.

In order to navigate the tough seas of unstable economies, you need to be aware of your business – it’s capabilities and capacities. You need to know its strengths and weaknesses and what is going on in the environment. This is the valuable information you need in order to make good decisions about the direction for your business. Lastly, remember that the environment is continually change – it shifts like sand, nearly every day. While there will be some things that rarely change – your belief statements, for example, there are other items that may change, such as your vendors, economic conditions, etc. Ensure that you have a regular practice of bringing up this list of business needs and making adjustments as your business has need.

Lastly, keep in mind that this is a framework. You may discover other areas that you need to emphasize certain areas of the business. However, generally speaking, when you are prioritizing the needs of the business, you will want to start from the base level (#1) and move forward (to #5). When you address issues, know that while you may skip certain things, ensure that this should only be a very short term situation, and that the closer to the base level the item is, the more impact it will have on the overall organization.

Financing a Small Business – What Are the Financial Responsibilities Involved in Running a Business?

Almost every potential business owner is faced with the trouble of seeking for ways in which finance can be acquired to run the business. However, it should be noted that such troubles are not only identified with potential entrepreneurs. Research has shown that even experienced business owners also faced such difficulties. Keep in mind that in seeking solutions to such difficulties, there will be accuracies as well as inaccuracies and these will all determine the success or failure of the business. The above is an indication that starting a business and running the business should not be an end in itself. You must seek for means through which the business will be able to stand the test of survival often posed by its competitors. The following lines are aimed at identifying ways through which a business can be financed, be it incorporated or unincorporated:

Unincorporated Business

This type of business will refer to those that have unlimited liabilities. In most cases, such businesses have not been properly documented and the status of legal personality is absent. There is no distinction between what the business owns from those of its owners. Keep in mind that in the event of any problem, the owners are personally liable for the debts of the company.

Any source of finance on this type of business organization will weigh on the owner. Keep in mind that there is no legal personality in the business and this will deter any lending institutions from providing capital to the business. What is normally open to owners of such businesses is finance through the use of credit cards or some other forms of personal savings. But the problem with using credit cards is great. Remember that you may sometimes make use of these cards out of intuition. It is simple to ‘charge it’.

For this reason, there are lots and lots of lending institutions which will be afraid or unwilling to lend to unincorporated associations. They will not want to place their finances in ventures in which they are uncertain about their future. A good number of such businesses have been known to disregard certain essentials in running the business or even in repaying back their loans.

Incorporated Businesses

These are businesses that have fulfilled all the essentials of setting up a business and that have adequate cover in the event of any crises. Such types of businesses will include limited liability companies or partnerships. In most cases, the records of these businesses are open for appraisal and the administration of such businesses will conform to the required business standards.

It is very easy for these types of businesses to receive the required finances. Keep in mind that lending institutions are more confident of their ability and willingness to pay back. Financing with such businesses will be easily obtained at any phase of the business. Remember that there are lots of individuals as well as groups who will be willing to come in with finance that the business needs. This is however possible only when the appropriate individuals or groups have been identified. This type of situation is known as angel financing. Remember that when a business is properly administered and it has a sound reputation, it will attract more investors. Investors will also find it appropriate to be part and parcel of the current affairs of the business.

Besides the above type of financing, there are also many financiers who are willing and able to invest in high risk ventures, but with an expectation of equally taking home more profits. The business can also make open its shares for acquisition by the general public. In some cases, banks and other finance institutions will be willing to finance these businesses if they see a convincing business plan. However, if you are in search of any means to finance your business, it is necessary to carry out proper research ahead of resorting to any source of finance.