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, http://www.irs.treas.gov
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.
About the author:
Doris Dobkins, Money Saving Expert Author of "Financial Freedom
A-Z Home Study Course" and publisher of the free weekly ezine
$mart Money New$ To subscribe, send an email by clicking on this
link --> mailto:join-smart_money_news@nova.sparklist.com or sign
up at her web site: http://www.creativefinances.com
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