Tax season is upon us. Already, I have had numerous friends contact me about the tax advantages of having my home-based business. I AM NOT A CPA OR TAX LAW PROFESSIONAL. I EMPLOY an amazing CPA that handles all my taxes and he lets me know exactly what I can and can’t deduct. The following are my personal experiences of the tax advantages that have come from the result of my own home-based business. Consult a CPA or tax law professional to determine the write-offs associated with your particular situation.
A few years ago, I thought I knew everything there was to know about tax advantages, and, 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 all that I thought I knew, but didn’t. If you have not read this book, I would definitely recommend it. Just to give you a sense of it, the first chapter 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 keep this example simple I’m not factoring in other investment income or anything else. 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 your taxable income and you either owe money or get a refund based on whatever tax bracket you are in, and the exemptions that you selected. Again, this is a very simplified example.
The 1099 structure, however, is a little bit different. Every single dollar you earn, you receive before taxes, then you DEDUCT all your deductible 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 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 involved 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.” That $2000-$10,000 could be used for a family vacation, a down-payment on a car, or to pay off debt. Here’s the kicker, MOST HOME-BASED BUSINESS OVERHEAD is UNDER $1000 per year.
The vast majority of people don’t have anything they can use for deductions on income taxes, and a home-based business is a great way to lower your tax burden. Here are some of the things you can deduct (this list is not all-inclusive), ALL OF THESE MUST BE CONDUCTED IN CONJUNCTION WITH BUSINESS ACTIVITIES:
- Utility Costs associated with a Home Office: Create a space for a home office, which will allow you to write-off portions of your utilities, rent/mortgage, and house cleaning. For example, if your home office is 10% of your house, you can deduct 10% of your utilities.
- Meals with a (potential) client/customer
- Drinks with a (potential) client/customer
- Mileage ($.58 per mile)
- Website Design and Development
Remember, all of these deductible activities MUST be conducted with business activities. For example, you can’t go have drinks with your buddies and expect to deduct it, unless having drinks with them was in conjunction with some sort of business activity. Bottom line: there is much of your everyday life that could be used as a tax deduction if you created a home-based business and conducted business activities in conjunction with those activities. These business activities could be meetings with colleagues, presentations, masterminding, mentorship sessions, training, generating leads, or any activity that contributes to running your business successfully. 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 would just 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 while I’m on vacation and show those pictures to prospective clients, the pictures becomes advertising and I can use that as proof that the trip was for business purposes, therefore I’m creating deductions. Likewise, if I’m by the pool and we are doing training or something, this is a business activity, thus creating another deduction. Finally, I used to take trips to San Antonio for Thanksgiving or Christmas. Now I create deductions for these trips, because I have team members in San Antonio that I work with. So, now when I go to San Antonio for Christmas, I also have meetings and give a presentation — a small adjustment with a big payoff.
If you are really looking to save money on your taxes, I would highly recommend getting into a home-based business that will provide you a way to create some tax deductions for yourself. If you have more questions or want to learn how to deduct your vacations, please feel free to contact me.