Thursday, January 26, 2012

The Tax Benefits of Owning Your Own Home Based Business

The Tax Benefits of Owning Your Own
Home Based Business

Courtesy of David Jesse

(cashflowfortheaverageJoe.com)

The Absolute Best Way, in my opinion, to qualify for significant tax deductions, is to start your own home based business!

DID YOU KNOW...
Congress has told the IRS to give Huge Tax Benefits and Deductions to taxpayers who have a home-based business, OR anyone who operated one at any time in the past 3 years?

In fact, you can actually put an additional $200 to $600 or more in your pocket each month, starting as soon as next week.

The average person pays a significant portion of their income every year to taxes, oftentimes representing their single largest expense.

Therefore, legally reducing your tax burden can become the single most important money saving strategy a person can use to improve their overall household financial condition.

Most people don’t realize how much they actually pay in taxes, because they don’t write a check for it every single month.

You see, the government was smart when they set up our tax system.

Instead of paying you your full wage and having you write the various government authorities a check every month for your taxes, the taxing authorities have your employer withhold these taxes directly from your paycheck, so you don’t ever see the money...it’s paid to the taxing authorities first, before you even get paid. What you don’t see, you can’t miss!!!

In addition, I believe there are two different tax systems in America...one for the employed and another for the self employed business owner. Please follow along carefully.

In a nutshell, here’s how our tax system works for an employee, step by step...

1) An employee works hard for their employer’s business, thus earning income.
2) An employee pays taxes on that income, through payroll withholdings, thus funding Uncle Sam’s business.
3) An employee pays the mortgage or rent on their residence, thus funding the bank’s or landlord’s business.
4) An employee then makes a payment on their credit card balance, thus funding the credit card company’s business.
5) An employee then pays all of their living expenses, thus funding all of those particular businesses.
6) Finally, at the end of all this, you may or may not have a few scraps left over for yourself to use for investment, savings, fun, a special purchase, etc.

It’s not how much money you make that counts, it’s how much you KEEP!

Most people work very hard for everyone else...not themselves...which is a shame.

To take control of your financial life, you need to have your own business. This also will provide you with additional tax benefits.

You need to have your money start working for you, instead of you working for money.

I’m not telling you that you need to quit your day job, but start building your own business on the side part time...I don’t care what it is!!! Do something!! Anything!!

Of course, your business, whatever it is you decide to do, must have a profit intent other than just the significant tax benefits.

The difference between an employee and a business owner is that an employee pays taxes on his or her income first, then pays for expenses.

A business owner, on the other hand, pays expenses first, and then pays taxes.

Let’s take a closer look at the tax situation of a business owner...

1) A business owner works hard or has employees that work hard, thus earning the business income.
2) A business owner then can take advantage of many tax benefits that employees are not permitted to take. Also, when done properly, the business owner may also be able to convert many former personal expenses into legitimate tax-deductible business expenses.
3) Finally, after taking all the tax benefits legally allowed by law, the business owner pays taxes on the amount left over...often at a lesser percentage than the employees that work for him or her.

Congress has approved a significant amount of deductions for business owners, to help them properly run their business, in an attempt to help the business grow.

The theory behind this...if you help a business grow, they will not only employ more people down the road and help the economy grow, but the business owner also will pay more taxes down the road as his or her business grows.

A business owner therefore has the advantage of being able to use the money his or her business makes to reinvest into the growth of the business, BEFORE paying taxes on that money...instead of paying taxes on that money first before you even physically receive that income.

Now, I don’t expect you to become a tax expert, but I would like for you to become more aware of how our tax system works, so you can make as much money as possible, and at the same time, reduce your taxes to the legal minimum.

Mileage on your Automobile
The standard mileage rate for 2011 is now $0.555 per business mile driven.

What this means is that your automobile, typically one of the most costly expenses for the average person, can become one of your largest tax deductions if you use it regularly as part of your business.

In other words, for every 2 business miles that you drive, you essentially receive a one dollar business tax deduction.

This can add up quickly, and a person that drives, say 5,000 miles for business during the year, is entitled to a business tax deduction of about $2,775.

Because you will use your automobile for personal use as well as business, you must maintain a usage log to validate your business use.

Furthermore, with proper documentation, planning, and use of your vehicle, you may be able to convert many former personal miles into tax deductible business miles. Again, get educated and learn how, when done properly, the tax laws can be followed and provide tax benefits for you and your business.

Hire Your Children
Hire your children to work for you in your business instead of paying them an allowance!

This can provide tremendous tax benefits for parents who still have dependent children between the ages of 7 and 18.

By running your business out of your home, and since your children probably do some work around the home anyway, why not have your home based business hire them and pay them real tax deductible wages.

According to the IRS, a dependent child as young as seven years old can qualify as an employee of their parent’s business. And if the child is a dependent on your tax return and under the age of 18, he or she is exempt from payroll taxes and the business is not required to withhold Social Security or Medicare taxes from their wages.

This is HUGE, as the wages paid are tax deductible for you, and the first $5,450 (for 2008) is not taxable to the child, as he or she will be able to take the standard deduction on his or her tax return and pay no taxes.

"But David, I don’t have enough money to be paying my child to work for my business!"...

Hold on...please keep reading...

As the parent and guardian of your dependent child, you will become the custodian of their bank account (where they will deposit their paycheck), since your minor child is not permitted to conduct banking transactions.

There are very few restrictions on how your child, the wage earner, or you, the custodian of his or her bank account, uses the money after it has been paid.

These funds can be used in many different ways for the benefit of your employed child…things such as new school clothes, new shoes, sporting equipment, music lessons, a new car, etc.

Please keep in mind, again, that you must keep proper records of all of this, with proper documentation and support.

Also, the wage you pay your child must be “reasonable and customary” for the work that was performed...you can’t just take the deduction without the work being performed and without payment being made to the child.

But what a great tax savings strategy, as well as an opportunity to teach your child about money!

In addition to these two ideas mentioned above, there are many, many, many...more potential tax benefits of operating your own home based business, thus saving you a tremendous amount of money...things such as home office expenses, computers, cell phones, office supplies, internet and telephone service, dues and subscriptions, computer software, travel, meals & entertainment, seminars, educational expenses, advertising, etc.

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