I'm busy enough! I don't have time to start a business!
What good would it do me anyway?
Well, having your own business is one of the best ways to save
money on taxes and considering that many of you just finished
paying Uncle Sam all your wages from January to May 2000, I
thought you might be interested in this topic.
Consider this example.
If you work for someone else (as in a JOB), your finances flow
somewhat like this:
1. Earn the money
2. Pay Taxes
3. Spend the money
When you have your own business or corporation, you:
1. Earn the money
2. Spend the money
3. Pay Taxes on what's left
Do you see the difference here? I'm going to recommend a book
for you to read if you want to understand this process better.
It is called "Rich Dad Poor Dad" by Robert Kiyosaki. It is a
great book and I highly recommend it. Now, back to our article.
When starting a business, The IRS requires only that you keep
good records, conduct your affairs in a business-like manner
and show that you are trying to make a profit. There are also
some new tax laws that are even more in favor of those "home
offices" than in previous years.
Old Tax Law: If your home office is your principal place of
business, then you could deduct home office expenses.
New Tax Law: If you have a space at home that you use
"regularly and exclusively for administrative or management
activities" in your business, you may now qualify for a home
office deduction.
Previously, if you worked outside of your home, you weren't
allowed to deduct your home office because it isn't the
"primary" place of business. Now you can. For more
information, see the Internal Revenue Service publication
#587 on the IRS Web site.
There are a lot of deductions associated with home offices.
Some things that might be deductible include a percentage of
your mortgage interest, property taxes, rent, utilities,
insurance, garbage collection, second phone line, cleaning
fees, magazines/newspapers, office supplies and equipment.
If your home is the principal place of business, you are
allowed to deduct the mileage for all your business trips. You
can count the mileage from your home to the place of business
(i.e. post office, bank, client site) and the return trip.
The IRS requires that you keep good records of your driving.
Keeping a little pocket calendar in your car or handbag is
an easy way to track mileage on a daily basis. At 32.5-cents
a mile, every 307 miles of driving will earn you a $100
deduction. This can add up very quickly over the course
of a year. I know it does for me.
If you have children under 18, hire them to work in your
business. You must issue them a W-2 and all the money you pay
them is a business deduction for you. Your child must pay
taxes on the money they earn but there is no tax on the first
$4,300 of income earned from working. Your child can even
deposit up to $2,000 into an IRA account for even bigger
savings. There's also no Social Security tax to pay when you
hire your child under 18. Please remember that your child must
do real work and you must keep good records. I know people who
send their children to private schools on tax-free income.
They pay their child to work in their business and the child
uses that income to pay tuition.
Are you starting to see some of the possibilities here?
Any purchases you make in association with your business are
deductible. If your business is enjoyable and related to your
interests, you might have made some of these purchases anyway
and now they are deductible.
If you are going to have a business for tax reasons, your
intent should be to make a profit at some point. The IRS knows
that there are significant costs in starting a business and
that it might not be profitable for a few years. A general
rule is to show a profit within two to four years. The longer
you go without making a profit, the more likely the IRS might
consider your business a hobby and disallow the deductions you
are claiming unless you can show a business plan with a definite
plan to be profitable and show changes when needed to increase
your chances for profitability.
So once again, consider a side-business. It could save you
hundreds of tax dollars every year.
