Soon it will be that time of year when tax season is upon us. Already, I have had numerous friends contacting me about the tax advantages of owning a home-based business. This blog post will be all about the tax advantages associated with owning a home-based business.
Until last year, I thought I knew everything there was to know about tax advantages. Boy, was I wrong! My friend, Cody Andrews, recommended a book, Lower your Taxes: Wealth-Building, Tax Reduction Secrets from an IRS Insider by Sandy Botkin (Former IRS Attorney and Senior Tax Law Specialist), and I learned what I didn’t know, but thought I did. If you have not read this book, I would definitely recommend it. The first chapter of the book is entitled, “Why You Would Be Brain Dead Not to Start a Home-Based Business.” 🙂
In the US, there are two tax structures: the W-2 structure for employees and the 1099 structure for Business Owners. To make this example simple, I won’t factor in other investment income or anything. The way the simple W-2 works is you make your Gross Wage, then your employer takes out the Federal, Social Security, and Medicare taxes. Then, you are left with your Take-Home Pay (Wage -Taxes = Take-Home Pay or Taxable Income). At the end of the year, you are taxed based on your Taxable Income and you either owe money or get a refund based on whatever tax bracket you are in and the exemptions you selected.
The 1099 Structure is a little bit different. Every single dollar you earn, you receive before taxes. Then, you DEDUCT all your taxable business expenses and whatever is left becomes your Taxable Income. Income – Deductions= Taxable Income. For example, if someone makes $100,000 in a year with a 1099 and they have taxable deductions that equal $60,000, they will only have to pay taxes on the $40,000. The 1099 and the tax deductions allow you to “redirect” your expenses in the normal day-to-day running of your business. In his book, Sandy Botkins writes, “You can probably save $2000-$10,000 a year by starting your home based business part time.” Here’s the kicker, MOST HOME BASED BUSINESS OVERHEAD is UNDER $1000 per year. YOU CAN MAKE MONEY JUST BY STARTING A BUSINESS.
Here are some of the things you can deduct. This list is not all inclusive. ALL OF THESE MUST BE CONDUCTED IN CONJUNCTION WITH BUSINESS ACTIVITIES.
-Create a home office and you can write off your utilities, rent/mortgage, and house cleaning for that portion of your home. For example, if your home office is 10% of your house, you can write off that 10%.
-Mileage ($.58 per mile)
The bottom line here is much of your everyday life could be used as a tax deduction if you created a home based business and conducted business activities. These business activities could be meeting with colleagues, conducting presentations, masterminding, or attending mentorship sessions. Any home based business will do and will give you the tax advantages you are looking for. There are lots of home based business opportunities out there, you just have to find the right one for you.
Although, any business will do, I feel that travel will give you the most bang for your buck. For instance, have you seen this little blue sign?? Well when I take pictures with it in Mexico, or any other destination for that matter, it becomes advertising and I can use that as proof that the trip was for business purposes. (Even though they were for business, there was a lot of pleasure I got from these trips too! 🙂 ) As well, we have to do “research” in order to recommend (or to not recommend) certain resorts to our customers. Likewise, if I’m by the pool and conducting a mentorship session, or something to that effect, this is a business activity. Thus, another deduction opportunity is created! Finally, I used to take trips to San Antonio for Thanksgiving. Now I create deductions for these trips, I have team members in San Antonio that I work with. So now instead I go to San Antonio for business and also have Christmas or Thanksgiving with my family.
If you are really looking to save money on your taxes this year, I would highly recommend getting into a home based business that will provide you a way to create some tax deductions for yourself. Before doing so, you will definitely want to contact a tax law professional, which I am not, but if you have more questions about tax deductions or want to learn how to deduct your vacations, please feel free to contact me.