It’s No April Fool…..It Is “Tax Time”………
Your Home Business And Your Taxes……
Many people who start home businesses have received very substantial, immediate 'cash refunds'...and others have created brand new $200 - $300 -$300/month cash flows - year after year - because of previously unknown 'tax deductions'. This is often enough to totally 'finance' their business growth. In today's economy, with interest rates on savings at a puny "3%"...we would need to have a capital sum of $120,000. in the bank at 3%, to 'generate' that same $300 per month (and that's 'before' tax)!
Will these refunds occur for everyone with a home business?
NO, because of the many different individual circumstances we encounter. But because of the possibility of its large potential, this is simply a strong recommendation to carefully "check it out" with a CPA - it could very well apply for you. The "taxes" we pay over a lifetime are the single biggest expenditure we make, period. Although tax revenues fund vast services and worthy causes...it's entirely appropriate to take whatever legal means we have at our disposal to 'control' the outflow.
Tax law is very fluid. It is changing all the time, so parts of it can become outdated quickly. And there are certain strict rules, which 'must' be followed. Here's a 'general' overview only...
Uncle Sam (IRS) and Revenue Canada (CCRA) 'want' us to prosper...because they eventually get their 'pound of flesh' from that "income" (those "profits"). They have both made their tax policies in a way that makes it possible for the Home Business entrepreneur to have 'tax write offs', including writing off our vacations. However, we must be in a position to 'prove' to both the IRS and CCRA that we are making a concerted effort to make a PROFIT (a reasonable expectation) with our home business. That is the only test we are required to meet.
In the US, Congress passed tax legislation that 'requires' the IRS to help us if we own a home business and manage it with a genuine purpose of making a profit. That is true even if we are not successful at making a 'profit'...but just the creation of some 'cash flow'. Keep in mind; profitable businesses pay a lot more in taxes. So, it is wise for Congress to design the tax code to help those who honestly pursue their own business.
Do we know what kind of tax deductions we may be allowed?
We'll start with the HOME (apartment / condo) itself. This is a list of just some of the things that we may be able to deduct.
- Rent
- Electricity, gas, or oil
- Interest on your mortgage
- Home maintenance
- Medical expenses for spouses working together ***
- Purchase of office furniture and equipment
- Coffee and sugar (if we hold business briefings at home)
- Insurance
- Realty taxes
- Cleaning supplies
- Condo fees
- Security system
- Garbage collection
- Depreciation
If we employ our spouses in our business, we can supply them with a 100% Medical Reimbursement Plan as an 'employee benefit'. This makes 100% of all medical, dental and optical expenses deductible + more.
Many people who start home businesses have received very substantial, immediate 'cash refunds'...and others have created brand new $200 - $300 -$300/month cash flows - year after year - because of previously unknown 'tax deductions'. This is often enough to totally 'finance' their business growth. In today's economy, with interest rates on savings at a puny "3%"...we would need to have a capital sum of $120,000. in the bank at 3%, to 'generate' that same $300 per month (and that's 'before' tax)!
Will these refunds occur for everyone with a home business?
NO, because of the many different individual circumstances we encounter. But because of the possibility of its large potential, this is simply a strong recommendation to carefully "check it out" with a CPA - it could very well apply for you. The "taxes" we pay over a lifetime are the single biggest expenditure we make, period. Although tax revenues fund vast services and worthy causes...it's entirely appropriate to take whatever legal means we have at our disposal to 'control' the outflow.
Tax law is very fluid. It is changing all the time, so parts of it can become outdated quickly. And there are certain strict rules, which 'must' be followed. Here's a 'general' overview only...
Uncle Sam (IRS) and Revenue Canada (CCRA) 'want' us to prosper...because they eventually get their 'pound of flesh' from that "income" (those "profits"). They have both made their tax policies in a way that makes it possible for the Home Business entrepreneur to have 'tax write offs', including writing off our vacations. However, we must be in a position to 'prove' to both the IRS and CCRA that we are making a concerted effort to make a PROFIT (a reasonable expectation) with our home business. That is the only test we are required to meet.
In the US, Congress passed tax legislation that 'requires' the IRS to help us if we own a home business and manage it with a genuine purpose of making a profit. That is true even if we are not successful at making a 'profit'...but just the creation of some 'cash flow'. Keep in mind; profitable businesses pay a lot more in taxes. So, it is wise for Congress to design the tax code to help those who honestly pursue their own business.
Do we know what kind of tax deductions we may be allowed?
We'll start with the HOME (apartment / condo) itself. This is a list of just some of the things that we may be able to deduct.
- Rent
- Electricity, gas, or oil
- Interest on your mortgage
- Home maintenance
- Medical expenses for spouses working together ***
- Purchase of office furniture and equipment
- Coffee and sugar (if we hold business briefings at home)
- Insurance
- Realty taxes
- Cleaning supplies
- Condo fees
- Security system
- Garbage collection
- Depreciation
If we employ our spouses in our business, we can supply them with a 100% Medical Reimbursement Plan as an 'employee benefit'. This makes 100% of all medical, dental and optical expenses deductible + more.
It should be pointed out that we are unable to claim 100% of our expenses for the 'entire' list. It is necessary to have a 'formula' to determine what percentage of the total we will use for our home office. That can usually be done in two ways.
Calculate the 'percentage of the total home' used for our home office using the area of each. There are established guidelines for these measurements.
The second way, if all rooms in the home are of about the same size, is to use the number of rooms used for our home office as a percentage of the total'. Both the IRS and CCRA have a requirement that the rooms being expensed must be used 'exclusively' for our HBB. We cannot set up a desk in our living room, as an example, and write off the room. We can have a pullout sofa in our office that is used occasionally for overnight guests. There are a few exceptions to the exclusive use rule. It is suggested we talk with our accountant to see if our HBB qualifies.
Our VEHICLE will also qualify for tax deductions, if used for business. But, as with our home, it is necessary to keep a record of the percentage of 'business' use and 'personal' use. To me, this is the hardest part of keeping records for my car, because I find it a nuisance (but it's well worth it). Since I use my car more for work that I do personal use, I found the easiest way for me was to note my starting mileage each morning and record the number of personal miles driven on that day on a card kept in the car for that purpose. You may find another system that works for you, but it has to be 'written' in order to be able to verify the expense we claim. We should be able to cross reference these notes with our appointment book, in case of audit.
So what vehicle expenses can we deduct?
In a few words, all 'operating costs' of our vehicle, and depreciation within limits.
These include:
- Interest on the car loan
- Lease payments
- Gas and oil
- Maintenance
- Insurance
- Parking and tolls
- Depreciation if you own the vehicle
Let's use some 'pretend numbers' and see the effect they might have on our tax bill.
(1)- HOME...Assume 15% of our HOME is used for our Home Business...Assume the total annual operating cost of our home, excluding depreciation is $16,000. We can write $2,400 off against our tax bill - just for our home alone.
(2)- VEHICLE...Let's now assume that we have used our vehicle 25% for business, and that total vehicle expenses, excluding depreciation, are $7,800. We get to claim another $1,950 against our taxes.
So, our 'total' tax deduction so far = $4,350, plus depreciation. If we are in a 35% tax bracket, we will have saved over $1,500 on our income taxes - just by operating a Home Business. That is enough to make an additional mortgage or rent payment...or pay for a trip...or to fund a typical MLM 'autoship' for a year.
What about the costs associated with running our HOME BUSINESS 'itself'...such as business cards... stationery...photocopying...computer fees...internet provider... autoresponders...marketing systems...advertising & promotion...the purchasing of leads...the purchase of products...and other expenses?
Most of these are fully eligible tax deductions but again, check with a tax provider to be sure.
Okay, so now we want to write off our VACATION...
That is simple to do. We arrange to 'do business' where we want to vacation. We can attend a seminar or make appointments where we want to go. Both CCRA and IRS allow attending conferences in resorts, provided certain conditions are met.
What about making our Children’s CLOTHING tax deductible, too?
If they're between the ages of 5 and 18, we can put them 'on the payroll', and pay our children a reasonable amount to do jobs that need to be done...deliver flyers, typing, etc. They become a 'legitimate tax deduction'. Now have the children buy their 'own clothes' + lots of other things. There are specific upper limits allowed (substantial, per child - over $4,500.), and age limitations - specified in the Tax Code.
We need to discuss these points carefully with our tax advisor, as tax rules are always changing. We also need good "records" for all activities...and keep receipts for "everything".
This is not intended to be a full discussion about the tax benefits of operating a Home Business by any means - it is merely an outline of 'some' of the benefits it may bring us....an alert to something that could have a critical impact on our finances. Again, it is strongly recommended that we discuss 'individual' tax strategies with our accountant, tax or financial advisor.
The two Government websites which will give us additional info are:
USA - www.IRS.USTREAS.gov (for 'tax withhold' form, look for Form W-4 -and take to Employer) -- OR- ( Click Here for your W4 Form )
Canada** - www.CCRA-ADRC.ca ** (Also retrieve Form T2124 - includes a 'Home Business' section / Canada)
Another website that's very useful is tax/legal expert Sandy Botkin's at...www.TaxReductionInstitute.com
A Little Bit Of Tax Humor…..
A Letter To God
A little boy wanted $100.00 badly and prayed for two weeks but nothing happened. Then he decided to write God a letter requesting the $100.00. When the postal authorities received the letter addressed to God USA, they decided to send it to President Busch. The president was so impressed, touched, and amused that he instructed his secretary to send the boy a $5.00 bill. President Busch thought this would appear to be a lot of money to a little boy. The little boy was delighted with the $5.00 and sat down to write a thank you note to God, which read: “Dear God, Thank you very much for sending the money, however, I noticed that for some reason you had to send it through Washington D.C. and, as usual, those crooks deducted 95%
Calculate the 'percentage of the total home' used for our home office using the area of each. There are established guidelines for these measurements.
The second way, if all rooms in the home are of about the same size, is to use the number of rooms used for our home office as a percentage of the total'. Both the IRS and CCRA have a requirement that the rooms being expensed must be used 'exclusively' for our HBB. We cannot set up a desk in our living room, as an example, and write off the room. We can have a pullout sofa in our office that is used occasionally for overnight guests. There are a few exceptions to the exclusive use rule. It is suggested we talk with our accountant to see if our HBB qualifies.
Our VEHICLE will also qualify for tax deductions, if used for business. But, as with our home, it is necessary to keep a record of the percentage of 'business' use and 'personal' use. To me, this is the hardest part of keeping records for my car, because I find it a nuisance (but it's well worth it). Since I use my car more for work that I do personal use, I found the easiest way for me was to note my starting mileage each morning and record the number of personal miles driven on that day on a card kept in the car for that purpose. You may find another system that works for you, but it has to be 'written' in order to be able to verify the expense we claim. We should be able to cross reference these notes with our appointment book, in case of audit.
So what vehicle expenses can we deduct?
In a few words, all 'operating costs' of our vehicle, and depreciation within limits.
These include:
- Interest on the car loan
- Lease payments
- Gas and oil
- Maintenance
- Insurance
- Parking and tolls
- Depreciation if you own the vehicle
Let's use some 'pretend numbers' and see the effect they might have on our tax bill.
(1)- HOME...Assume 15% of our HOME is used for our Home Business...Assume the total annual operating cost of our home, excluding depreciation is $16,000. We can write $2,400 off against our tax bill - just for our home alone.
(2)- VEHICLE...Let's now assume that we have used our vehicle 25% for business, and that total vehicle expenses, excluding depreciation, are $7,800. We get to claim another $1,950 against our taxes.
So, our 'total' tax deduction so far = $4,350, plus depreciation. If we are in a 35% tax bracket, we will have saved over $1,500 on our income taxes - just by operating a Home Business. That is enough to make an additional mortgage or rent payment...or pay for a trip...or to fund a typical MLM 'autoship' for a year.
What about the costs associated with running our HOME BUSINESS 'itself'...such as business cards... stationery...photocopying...computer fees...internet provider... autoresponders...marketing systems...advertising & promotion...the purchasing of leads...the purchase of products...and other expenses?
Most of these are fully eligible tax deductions but again, check with a tax provider to be sure.
Okay, so now we want to write off our VACATION...
That is simple to do. We arrange to 'do business' where we want to vacation. We can attend a seminar or make appointments where we want to go. Both CCRA and IRS allow attending conferences in resorts, provided certain conditions are met.
What about making our Children’s CLOTHING tax deductible, too?
If they're between the ages of 5 and 18, we can put them 'on the payroll', and pay our children a reasonable amount to do jobs that need to be done...deliver flyers, typing, etc. They become a 'legitimate tax deduction'. Now have the children buy their 'own clothes' + lots of other things. There are specific upper limits allowed (substantial, per child - over $4,500.), and age limitations - specified in the Tax Code.
We need to discuss these points carefully with our tax advisor, as tax rules are always changing. We also need good "records" for all activities...and keep receipts for "everything".
This is not intended to be a full discussion about the tax benefits of operating a Home Business by any means - it is merely an outline of 'some' of the benefits it may bring us....an alert to something that could have a critical impact on our finances. Again, it is strongly recommended that we discuss 'individual' tax strategies with our accountant, tax or financial advisor.
The two Government websites which will give us additional info are:
USA - www.IRS.USTREAS.gov (for 'tax withhold' form, look for Form W-4 -and take to Employer) -- OR- ( Click Here for your W4 Form )
Canada** - www.CCRA-ADRC.ca ** (Also retrieve Form T2124 - includes a 'Home Business' section / Canada)
Another website that's very useful is tax/legal expert Sandy Botkin's at...www.TaxReductionInstitute.com
A Little Bit Of Tax Humor…..
A Letter To God
A little boy wanted $100.00 badly and prayed for two weeks but nothing happened. Then he decided to write God a letter requesting the $100.00. When the postal authorities received the letter addressed to God USA, they decided to send it to President Busch. The president was so impressed, touched, and amused that he instructed his secretary to send the boy a $5.00 bill. President Busch thought this would appear to be a lot of money to a little boy. The little boy was delighted with the $5.00 and sat down to write a thank you note to God, which read: “Dear God, Thank you very much for sending the money, however, I noticed that for some reason you had to send it through Washington D.C. and, as usual, those crooks deducted 95%
