Starting and operating your own home based business isthe ultimate tax shelter.
Although this article has been written from a Canadianincome tax perspective, the principles should be practical in other tax jurisdictions.
1. Non-Deductible Personal Living Expenses
All of us have expenses that we incur in everydayliving.
Either you rent an apartment or house or you own yourresidence. Utilities, insurance, rent, mortgage interest, property taxes, and maintenance and repairs are typical costs of operating your home.
Likely, you have a vehicle which also consumes largeamounts of cash.
Add to this, dining out, entertainment, gifts, alcoholic beverages, office supplies, telephone andmany other expenditures, and you have a significantcash outflow.
In most cases, as an employee, retired person,investor, student, or homemaker, few of theseexpenses are tax-deductible to you.
This means that you must earn a considerable income, pay your income taxes first, and then use what isleft to pay all your expenses.
Some employees may be able to write-off some oftheir employment related expenses, if such arerequired by their contract of employment. 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 startyour own home based business.
Suddenly, many of your everyday expenses are now beingused for business purposes and are now tax-deductible.
If you use one quarter of your home exclusively forbusiness use, 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, houseor apartment insurance, power, heat, water, and property taxes.
As well, your vehicle expenses used for business purposes are another tax write-off. If you use yourcar ninety percent for business purposes, you can deduct ninety percent of your vehicle insurance, gasand oil, maintenance and repairs, car washes, licenseand registration, auto club, loan interest (withincertain limits), and other costs from your income.You may also write-off one hundred percent of yourbusiness related parking. Capital Cost Allownance(C.C.A.) on your vehicle is also allowed for income tax purposes; depreciation is the accounting term for this tax deduction.
The Canadian government also allows as a deduction,fifty percent of your business related entertainmentexpenses.
Also tax-deductible are business related telephoneexpenses, 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 incomedoes.
With your own business, you can pay reasonable wages toyour spouse and children. In this way, you can legallydivert income taxed at your higher rate to your familymembers that are in a lower tax bracket.
This tax saving technique is called income splitting.It is another good reason why your own home basedbusiness is the ultimate tax shelter.
4. Even a Part-Time Home Based Business Works
Even if you have a full-time job, running a part-timebusiness can be advantageous.
Of course, you must actually run a real, moneymakingbusiness. Any attempts to write unprofitable hobbiesoff will ultimately fail with the taxation authorities.
If you earned eight thousand dollars during the yearfrom your part-time business and were able to deducteight thousand dollars in car expenses, home officeexpenses, entertainment costs, office supplies, andother business related expenditures, you would have anet business income of nil. You would pay no tax onthis additional income.
Don`t miss this important point! Although these taxdeductions are actual, legitimate business expenses,these are expenditures you would probably have madeanyway, whether you had a business or not.
Thus, by rearranging your affairs to start and operatea home based business, you have been able to convertnon-deductible personal expenditures into legallydeductible business expenses. You have successfullysheltered your income from tax and have split yourincome with family members in lower tax brackets.
Yes, indeed, your home based business has become your ultimate tax shelter.
RESOURCE BOX:
J. Stephen Pope, President of Pope Consulting Inc., http://www.popeconsultinginc.com/ has been helping clients to earn maximum business profits for over twenty-five years.
For valuable Work at Home Small Business Ideas, visit: http://www.yenommarketinginc.com/
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