Tuesday, January 4, 2011

Home Based Business: Your Ultimate Tax Shelter

Starting and operating your own home based business is the ultimate tax shelter.

1. Non-Deductible Personal Living Expenses

All of us have expenses that we incur in everyday living.
Either you rent an apartment or house or you own your residence. Utilities, insurance, rent, mortgage interest, property taxes, maintenance and repairs are typical costs of operating your home.  You may also be lucky to have a vehicle for  which you also have to outlay a lot of cash for upkeep.   if you add, dining out, entertainment, gifts, alcoholic beverages, office supplies, telephone and many other expenditures, you have a significant cash outflow.

For most W-2 employee, retired person, investor, student, or homemaker, few of these expenses are tax-deductible to you.  This means that you pay your income taxes first, and then use what is left to pay all your expenses.  Some employees contract of employment may  allow them to write-off some of their employment related expenses.  However, even in this situation the tax deductions are very limited.

2. Your Own Home Based Business Means Tax Deductions

Now consider the situation where you decide to start your own home based business.  Suddenly, many of your everyday expenses are now being used for business purposes and are now tax-deductible.  If one quarter of your home is used exclusively for business, you will be able to deduct (or write-off) one quarter of all related occupancy costs. These expenses may include maintenance and repairs (that are not capital in nature), rent, mortgage interest, house or apartment insurance, power, heat, water, and property taxes.

Your vehicle expenses used for business purposes are another tax write-off.  If you use your car ninety percent for business purposes, you can deduct ninety percent of your vehicle insurance, gas and oil, maintenance and repairs, car washes, license and registration, auto club, loan interest (within certain limits), and other costs from your income. You may also write-off one hundred percent of your business related parking. Capital Cost Allowance (C.C.A.) on your vehicle is also allowed for income tax purposes, depreciation is the accounting term for this  tax deduction.  Other tax-deductible items are business related telephone expenses, Internet access, office supplies, travel, books, memberships, and a host of other expenditures.

3. Income Splitting with Your Home Based Business                                                      

If you have a high paying job, you will pay higher taxes because the rates of tax increase as your income goes up.  With your own business, you can pay reasonable wages to your spouse and children. In this way, you can legally divert income taxed at your higher rate to your family members that are in a lower tax bracket.  This tax saving technique is called income splitting. It is another good reason why your own home based business is the ultimate tax shelter.

4. Even a Part-Time Home Based Business Works

If you have a full-time job, running a part-time business can be advantageous.
Of course, you must actually run a real, moneymaking business. Any attempts to write unprofitable hobbies off will ultimately fail with the taxation authorities.

If you earned eight thousand dollars during the year from your part-time business and were able to deduct eight thousand dollars in car expenses, home office expenses, entertainment costs, office supplies, and other business related expenditures, you would have a net business income of nil. You would pay no tax on this additional income.  Don`t miss this important point!  Although these tax deductions are actual, legitimate business expenses, these are expenditures you would probably have made anyway, whether you had a business or not.

By rearranging your affairs to start and operate a home based business, you have been able to convert non-deductible personal expenditures into legally deductible business expenses. You have successfully sheltered your income from tax and have split your income with family members in lower tax brackets.
Yes, indeed, your home based business has become your ultimate tax shelter.

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