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Article Series: Taxes
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Great Tax Shelter - Own a Small Business
If tax time equals sleepless nights for you,
as you wonder what kind of bill you’re going to be socked with
this year, and how you will ever pay it, then you should know
that there are ways to take chunks out of that bill before
you even pull out your checkbook. Educate yourself about all
of the tax deductions out there, and take advantage of every
single one that applies to you. While things like homeownership
and charitable donations make great tax deductions, the best
tax relief going comes in the form of your own business. If
you are self employed, then your business may be the key to
making sure you don’t have to turn too much money over to Uncle
Sam every April, or better yet, may help you make sure Uncle
Sam is writing a check to you instead.
When it comes to looking for things to deduct from your taxes,
the trick is to find a way to make as many of your normal expenses
as tax deductible as possible. That is why your own
business makes such a great tax shelter. Almost every penny you spend
can be considered a business expense. If you run a home based
tutoring service, then everything from your pens and pencils
to snacks for your students to the electricity you use can
be written off of your tax bill. If you’re a self-employed
carpenter, then your van, your gas costs, your tools, your
phone, and your home – even if you are a renter – are all tax
deductible. The IRS only requires that your business expenses
be “reasonable” and the courts have been extremely lenient
in terming what is reasonable and what is not. One recent case
involved a teacher who was allowed by the courts to deduct
his golf expenses from his taxes, because he claimed golf was
a business networking opportunity.
Of
course, you can’t just wake up one day and decide that you
are a business owner. The process of setting up a business
does not have to be difficult or costly, but there
are a few requirements you will need to fulfill. First,
you will need to file a so-called “DBA” form – “Doing Business
As” – with
your local courthouse. All this involves is filling out a form
stating your name and address and your business name. For an
extra layer of protection, file a 5213 form with the IRS; this
form will prevent the IRS from challenging any of your business
deductions for the first five years of the business.
The test the IRS uses to make sure your business is legitimate
is to ask if you have a “profit motive.” This does NOT mean
you have to make a profit; you only have to demonstrate that
you WANT to make a profit. This is what separates hobbies from
tax-deductible businesses. Your intentions are determined by
the way you approach your business – do you treat it like a
profession and spend a consistent amount of time working on
it? Note again that your business plan does even have to show
a reasonable hope of making a profit anytime soon; as long
as you are motivated by making a profit, then your expenses
are tax deductible.
If these deductions sound too good to be true, you should
know that claiming them requires a lot of work on your part.
You must save and organize all of your receipts and keep meticulous
records, in case you are ever audited. If you’re serious about
your business deductions, get a qualified financial advisor
to oversee your tax preparations to make sure you are claiming
everything you can and going about it correctly.
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SolveYourProblem.com : 2007
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