How to Calculate the Taxable Income of a Home Business

by Charlotte Johnson

A crucial part of running a business from home is calculating and paying your taxes correctly. Your taxable income is the amount of money that you earn minus your deductions. Incorrect calculations can bring about penalties from the Internal Revenue Service, which may cost you quite a bit of money. Implement some organizational skills and conduct a few basic mathematical calculations to determine your taxable income.

1. Record all of your earnings and business-related expenses over a specific taxable period. This period is yearly for some people and quarterly for others.

2. Add your total earnings to determine your gross income.

3. Add your expenses. Common home business expenses include office supplies, utilities, phone, Internet, software, materials and occasional business-related travel. If certain resources apply to other areas of the home, you will have to determine the percentage that is related to your business. For example, consider a situation in which you pay $500 per year for Internet service. If you use 90 percent of the Internet service for your business and 10 percent for personal use, you would multiply 0.90 times 500 to get a business expense of $450.

4. Subtract your total expenses from your gross income to determine your taxable income. For example, if you earned a total of $50,000 and you spent $10,000, you would subtract $10,000 from $50,000 to get a taxable income of $40,000.

Items you will need

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